Luke Brookes created the illustration.
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There is such a thing as having too much of a good thing. Investors’ portfolios may be uncomfortably concentrated on these winners after riding five megacap technology firms to new highs after new highs, at a time when some strategists predict a major market turn coming. Having Control of the Big Five—
Apple
AAPL (ticker: AAPL) is a publicly traded company in the United States.
Microsoft
(MSFT),
Amazon.com
(AMZN),
(Facebook), and
Alphabet’s
Google (GOOGL) has shown to be profitable: Since the start of the year, these companies have seen gains ranging from 125 percent to 245 percent. These stocks are commonly held not only by index investors, but also by active fund managers of all types, even those who don’t generally invest in growth companies.
The five companies together account for over 22% of the market.
S&P 500 Index
index. The Nifty Fifty stocks, of course, dominated the 1970s, as did blue-chip stalwarts like IBM.
IBM
IBM (IBM) and
AT&T
The 1980s were dominated by (T). According to Howard Silverblatt, senior index analyst at S&P Dow Jones Indices, those companies may have had even more influence over the economy than today’s biggest companies, but market concentration is higher now, and the Big Five’s impact on the broad market is much greater because of their size. Apple and Microsoft are the first U.S. stocks to surpass $2 trillion in market value. Apple’s greatest concentration for a single company in the S&P 500 was approximately 7% last year, greater than IBM’s in its prime, despite a little decline this year.
Quarterly Report on the Rest of the Funds
There are hints that investor appetite for risk is decreasing, which might harm Big Tech’s growth ambitions. In speculative areas of the market, such as cryptocurrencies and special purpose acquisition companies, or SPACs, there has been a selloff. There’s also the growing concern that both inflation and interest rates will continue to rise. The entire market, including all index investors, will be affected if the Big Five slow down or fall. According to Bloomberg, if these stocks fall 10%, the bottom 100 stocks in the S&P 500 would have to gain by a collective 75% in order for the index to remain flat.
Goldman Sachs is a financial services firm.
This dynamic explains why large losses are frequently preceded by narrow market breadth.
Returns over five years are annualized.
The active share of a fund is a measure of how far its holdings differ from its benchmark. The lower the score, the less overlap there is.
Morningstar and corporate reports were used as sources.
These equities are overrepresented in investors’ portfolios, making them less diversified in the event of a market downturn. These businesses have already started to slow down. Take Amazon, which makes up around 4% of the S&P 500, more than the oil, real estate, materials, or utilities sectors combined. Amazon has yet to reach an all-time high this year, and it has underperformed the S&P 500 by 25% since September 2020, owing to concerns over the company’s e-commerce development. Add in regulatory pressure, which might make the road ahead more difficult for these businesses, such as a House panel’s adoption last month of comprehensive legislation aimed at limiting the dominance of Google and Facebook. The Big Five stocks may become less unique as the world recovers. According to Scott Opsal, director of research at Leuthold Group, “the story line with megacap tech stocks has been that economic growth has been hard to come by and rates have been so low that you wanted to buy tremendous growth stocks.” “However, if you believe the economy has opportunity to grow, you don’t have to pay for the growth that investors were willing to pay for in 2018 and 2019.” The shifting landscape has prompted Opsal to adopt a barbell strategy, which includes owning some of the technological winners but also diversifying into a broader range of more value-oriented and smaller firms.
With the market so concentrated in a few megacap tech stocks, Opsal believes that investors may choose funds that are ready to do what fund advisors advise against: be willing to stray from their lane and not fit cleanly into a growth or value category. Finding strong fund managers with the foresight to pick the appropriate stocks beyond the other 495, the fortitude to shun the herd, and the track record to show investors that they can be different and correct is difficult. Managers whose caution led them to purchase fewer of the technology darlings that drove the market to new highs over the last few years aren’t doing so well. And the decision to own none of these companies—or even just a small portion of them—has pushed some executives out of their jobs.
Morningstar
Large-cap blend is an example of a sub-category. High active share has long been used as a criterion for identifying fund managers who vary from their peers. That’s a fine place to start, but different doesn’t always equal outperformance, so Morningstar strategist Alec Lucas suggests learning about the managers’ portfolios and the reasoning behind their selections—as well as when they purchase and sell equities. Barron’s sought for large-cap growth-oriented managers with long and strong track records who don’t normally stick too close to an index. We found diversified and concentrated funds; some didn’t own any of the Big Five, while others did, although to a lesser extent than their peers. All of these companies could provide investors with a method to modify rather than restructure their portfolios, providing them additional variety while still investing in huge, expanding businesses. A Methodical Approach The Akre Focus fund (AKREX) is a concentrated investment. It owns roughly 20 well-managed businesses that its managers, John Neff and Chris Cerrone, believe are superior enterprises with a track record of reinvesting in them. The fund has a low turnover rate of 4%, which means it keeps its investments for years. That has proven to be a successful long-term strategy: Over the last decade, Akre Focus has outperformed 84 percent of its peers with an average yearly return of 18 percent. However, the last few years have been difficult: The fund hasn’t invested in the Big Five and only has about a third of its assets in technology companies, although most of its rivals have close to a third. Over the last three years, it has averaged 22 percent annual growth, which isn’t bad in absolute terms but puts it in the middle of the pack among competitors. The executives are adamant about discovering new sources of revenue. “They’re fantastic enterprises, but given their current size, how many more times can they double in value? “It’s a question that’s been asked many times, but it’s a critical question,” Neff adds. “We’ve primarily concentrated on smaller firms with ostensibly longer compounding runways.” The managers’ tech investments have primarily been in software companies such as Constellation Software (CSU.Canada),
Adobe
(ADBE), respectively.
The CoStar Group is a company that specializes in providing
(CSGP) that have a long road ahead of them as more businesses rely on their services. The fund also seeks for companies with the same type of “network effect” that makes Google and Amazon so appealing—the business model gets stronger as more people use it, making it that much more difficult to replace. Mastercard (MA) and Visa (V) are among the top holdings.
Visa
That’s where (V) came in. Many of the firms the duo prefers, such as auto-parts store Advance Auto Parts, are well-positioned to withstand, stand out, or even prosper from terrible times.
O’Reilly Auto Parts
(ORLY), which just announced its greatest comparable same-store sales in more than a quarter-century. Given the current market environment, co-manager Cerrone claims that they aren’t finding many discounts today—and that they are willing to hold cash if this trend continues. Cash currently has a yield of only 2%. Cerrone says, “We honestly wish we had more cash than we do today.” “We are not bearish, but we believe better opportunities will present themselves.” Growth That Is Underappreciated The $10.1 billion is a significant sum.
Odyssey Growth is a Primecap company.
The fund (POGRX) looks for companies that have outperformed the market in terms of profit growth, yet none of the Big Five tech corporations are among its top ten holdings. The fund’s underweight has cost it dearly: its yearly average return of 19.6 percent over the last five years ranks it in the bottom third of big growth funds. However, the executives’ willingness to invest in companies with above-average growth for the long term, often adding to their holdings during downturns, has won them admirers. According to Morningstar’s Lucas, the fund’s managers are investing in some of the Big Five’s broad themes, such as e-commerce and cloud computing, but in a unique way. For example, instead of owning Amazon, the fund holds Alibaba Group Holding (BABA), China’s equivalent of an e-commerce and cloud-computing behemoth that likewise trades at a significant discount to the American corporation, according to Lucas. Primecap did not respond to a request for comment. According to Morningstar, about 18 percent of the fund is invested outside of the United States, and its average price/earnings ratio is 20, which is lower than the 29 for the large growth category. Despite not being heavily invested in the Big Five tech stocks, the fund has about double the exposure in healthcare (nearly 30% of assets) as other significant growth funds. Its top ten places are as follows:
Eli Lilly is a character in the film Eli Lilly
(LLY),
Biogen
(BIIB),
Abiomed/n
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