Duncan Lamont
The data which suggests passive strategies could come unstuck.
Global stock markets have become increasingly top-heavy. At the end of October, the 10 biggest stocks in the US S&P 500 index made up a record 31% of the market (Figure 1).
This is clearly a problem for investors trying to build diversified portfolios as a significant proportion of their risk is being driven by a relatively small number of companies.
Our new research also shows that, historically, investors passively tracking the US stock market would have lost out on returns in the years following high levels of index concentration.
At a time when investors are increasing allocating to passively managed strategies at the expense of active, the tables could be set to turn.
This is not just an issue for the US stock market. The US has grown to be 63% of the global market at the end of October (MSCI All Country World Index (ACWI) index) so international investors have ended up with a lot in US stocks and, with that, a lot in just 10 stocks. Those 10 make up nearly 18% of the global market, the same as Japan, the UK, China, France, and Canada combined.
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