The never-ending rise in technology megacaps is driving stock-picking pros to do something they don’t want to do: give up on beating the benchmark.
With the likes of Microsoft Corp. and Nvidia Corp. all but owning 2023’s bull run, money managers faced a dilemma. So many stocks have been left in the dust that finding ones to beat the index is next to impossible — the hardest since 1987, by one measure. One remedy is to give up and let the S&P 500’s static allocations guide their own.
That’s what they did, in droves. It’s illustrated by something called the active-share ratio, a gauge kept by Bank of America Corp. among others that tracks how holdings of active funds deviate from the S&P 500. Near the end of last year, the indicator hit the lowest level since 2013. Managers are mirroring the index more than any time in a decade.
“Active managers typically justify their fees by producing alpha by security selection,” said Mark Freeman, chief investment officer at Socorro Asset Management LP. “But in a market where returns are being driven by just a handful of large-market-cap names, it becomes increasingly difficult to fulfill that mandate.”
Source: BofA
Propelled by the artificial-intelligence frenzy, the seven largest tech firms – also including Apple, Alphabet, Amazon.com, Meta Platforms and Tesla – have doubled on average in the past year. That’s four times as much as the S&P 500.
With gains concentrating in a few names, the rest of the market languished. Only 27% of the S&P 500’s constituents were ahead of the benchmark last year, the narrowest market breadth in BofA’s data history since 1987.
As a result of the wide divergence, the so-called Magnificent Seven saw their market share climb to unprecedented heights. At one point last year, their combined weight in the S&P 500 reached 29%, the most since at least 1980, data compiled by Goldman Sachs Group Inc. show.
Read the full article here by Lu Wang of Bloomberg News, Advisor Perspectives
