Embracing Disruption

Has the change in momentum put active investing back in the driving seat?

Stock market concentration, particularly in the US, has risen sharply over recent years, driven in part by the rise and growing dominance of the “Magnificent Seven” tech stocks – Apple, Microsoft, Nvidia, Alphabet, Amazon, Meta, and Tesla. Indeed, these stocks currently make up around 30% of the S&P 500’s total capitalization, while accounting for nearly two-thirds of the index’s returns in 2023.

Looking a little more broadly and taking, for example, the MSCI All-Country World Index – which consists of around 3,000 stocks from across emerging and developed economies – we see that, even with a global perspective, this index has around 20% of its value in the 10 largest US stocks (which, of course, include the Magnificent Seven). To put this into perspective, 10 years ago the market capitalization of these stocks would have represented about half the combined value of listed UK, France, Germany, and Japan companies – today, it is roughly equal.

Exhibit 1: Stock market concentration in the US, 2000-2024
Exhibit 1: Stock market concentration in the US, 2000-2024

Source: Datastream, S&P500 as of 13 August 2024

Concentration, volatility, and risk

The rise in concentration poses several problems for asset managers and investors across the board. For passive managers and investors – those that seek to track a market weighted index or portfolio – as concentration increases, diversification decreases, meaning portfolio outcomes become increasingly reliant on the performance of a small number of stocks. A cautionary tale, albeit an extreme example, comes with the case of Nokia – a company that once accounted 70 percent of the Helsinki stock exchange’s market cap and now trades around 95 percent down on its all-time high. Furthermore, as a result of increasing concentration, passive investors face growing exposure to systemic risks – the growth of ETFs has coincided with a sharp rise in stock correlation, as the prices of largest US stocks show an increasing propensity to move together.

For active managers, basic risk controls mean that replicating concentrated indices such as the S&P 500 is impossible. And most active managers would, of course, baulk at the thought of relinquishing control of around 30% of their portfolio – which is what would be required to take a neutral stance on the top 10 US names. Indeed, concentration is now reaching such high levels that even some passive managers are now restricting their exposure to the ultra-caps.

To compound the problem, eight of these top 10 names are essentially the same bet – artificial intelligence – and all but one feature volatility higher than the market average. Looking at prior decades, we find that market concentration featured sectors such as groceries and pharmaceuticals, with the occasional oil company and large industrial. These sectors have very different correlations to both each other and the broader economic cycle.

Yet the recent change in momentum means we are beginning to face a different landscape for investors, with active management now coming to the fore. By definition, active managers invest based on conviction and correlation to indices is a secondary consideration, if it features at all. Moreover, more concentrated markets are historically linked to greater volatility – a particular risk for passive investors – and, as momentum unwinds, generating predictable returns will entail finding uncorrelated sources of alpha in the markets.

Active management resurgent?

Asset allocation decisions for investors necessarily entail a broad range of considerations. Indeed, even those adopting a passive approach will need to make initial choices regarding allocation decisions before they “set and forget”. Yet more highly concentrated markets are less efficient and this – coupled with the recent change in momentum – presents greater opportunities for active management strategies.

Where previous decisions may have been based on perceived value or growth, perhaps today’s key decision is the level of passive over active, and this may be a good time to think about these ratios in the ever-present search for alpha.

  • Disclaimer
    Investing involves risk. The value of an investment and the income from it will fluctuate and investors may not get back the principal invested. Past performance is not indicative of future performance. This is a marketing communication. It is for informational purposes only. This document does not constitute investment advice or a recommendation to buy, sell or hold any security and shall not be deemed an offer to sell or a solicitation of an offer to buy any security.

    The views and opinions expressed herein, which are subject to change without notice, are those of the issuer or its affiliated companies at the time of publication. Certain data used are derived from various sources believed to be reliable, but the accuracy or completeness of the data is not guaranteed and no liability is assumed for any direct or consequential losses arising from their use. The duplication, publication, extraction or transmission of the contents, irrespective of the form, is not permitted.

    This material has not been reviewed by any regulatory authorities. In mainland China, it is for Qualified Domestic Institutional Investors scheme pursuant to applicable rules and regulations and is for information purpose only. This document does not constitute a public offer by virtue of Act Number 26.831 of the Argentine Republic and General Resolution No. 622/2013 of the NSC. This communication’s sole purpose is to inform and does not under any circumstance constitute promotion or publicity of Allianz Global Investors products and/or services in Colombia or to Colombian residents pursuant to part 4 of Decree 2555 of 2010. This communication does not in any way aim to directly or indirectly initiate the purchase of a product or the provision of a service offered by Allianz Global Investors. Via reception of this document, each resident in Colombia acknowledges and accepts to have contacted Allianz Global Investors via their own initiative and that the communication under no circumstances does not arise from any promotional or marketing activities carried out by Allianz Global Investors. Colombian residents accept that accessing any type of social network page of Allianz Global Investors is done under their own responsibility and initiative and are aware that they may access specific information on the products and services of Allianz Global Investors. This communication is strictly private and confidential and may not be reproduced, except for the case of explicit permission by Allianz Global Investors. This communication does not constitute a public offer of securities in Colombia pursuant to the public offer regulation set forth in Decree 2555 of 2010. This communication and the information provided herein should not be considered a solicitation or an offer by Allianz Global Investors or its affiliates to provide any financial products in Brazil, Panama, Peru, and Uruguay. In Australia, this material is presented by Allianz Global Investors Asia Pacific Limited (“AllianzGI AP”) and is intended for the use of investment consultants and other institutional /professional investors only, and is not directed to the public or individual retail investors. AllianzGI AP is not licensed to provide financial services to retail clients in Australia. AllianzGI AP is exempt from the requirement to hold an Australian Foreign Financial Service License under the Corporations Act 2001 (Cth) pursuant to ASIC Class Order (CO 03/1103) with respect to the provision of financial services to wholesale clients only. AllianzGI AP is licensed and regulated by Hong Kong Securities and Futures Commission under Hong Kong laws, which differ from Australian laws.

    This document is being distributed by the following Allianz Global Investors companies: Allianz Global Investors GmbH, an investment company in Germany, authorized by the German Bundesanstalt für Finanzdienstleistungsaufsicht (BaFin); Allianz Global Investors (Schweiz) AG; Allianz Global Investors UK Limited, authorized and regulated by the Financial Conduct Authority; in HK, by Allianz Global Investors Asia Pacific Ltd., licensed by the Hong Kong Securities and Futures Commission; in Singapore, by Allianz Global Investors Singapore Ltd., regulated by the Monetary Authority of Singapore [Company Registration No. 199907169Z]; in Japan, by Allianz Global Investors Japan Co., Ltd., registered in Japan as a Financial Instruments Business Operator [Registered No. The Director of Kanto Local Finance Bureau (Financial Instruments Business Operator), No. 424], Member of Japan Investment Advisers Association, the Investment Trust Association, Japan and Type II Financial Instruments Firms Association; in Taiwan, by Allianz Global Investors Taiwan Ltd., licensed by Financial Supervisory Commission in Taiwan; and in Indonesia, by PT. Allianz Global Investors Asset Management Indonesia licensed by Indonesia Financial Services Authority (OJK).

    3830425

Recent insights

Embracing Disruption

For many years, investing in China’s State-Owned Enterprises (SOEs) has typically been viewed by international investors as, at best, a low-quality proxy for China’s economic growth. They have been synonymous with low profitability, questionable governance, and poor shareholder returns.

Discover more

After an eventful few months in the markets – and looking forwards to a potentially volatile final quarter – Greg Hirt, our Global CIO Multi Asset, joins us once again to share his views and convictions on the global economic and market landscape.

Discover more

Achieving Sustainability

Technology brings new opportunities, but also sustainability challenges. The sector must balance both for an improved sustainability footprint.

Discover more

Allianz Global Investors

You are leaving this website and being re-directed to the below website. This does not imply any approval or endorsement of the information by Allianz Global Investors Asia Pacific Limited contained in the redirected website nor does Allianz Global Investors Asia Pacific Limited accept any responsibility or liability in connection with this hyperlink and the information contained herein. Please keep in mind that the redirected website may contain funds and strategies not authorized for offering to the public in your jurisdiction. Besides, please also take note on the redirected website’s terms and conditions, privacy and security policies, or other legal information. By clicking “Continue”, you confirm you acknowledge the details mentioned above and would like to continue accessing the redirected website. Please click “Stay here” if you have any concerns.