Why Hiring a Skilled Active Manager Is Critical During Today’s Highly Concentrated Stock Market

Executive summary:

  • Today's U.S. equity market is highly concentrated, with seven stocks contributing to an astonishing 96% of the Russell 1000 Index's year-to-date return.
  • Periods of high market cap concentration tend to lead to a tougher environment for active management because many equity managers tend to underweight mega-cap companies.
  • Because of this tendency, we believe it's crucial to work with managers who can identify idiosyncratic differences between mega-cap companies and adjust weightings accordingly.

Who wants Apple in their lives more: My 10-year-old daughter and her peers or an active equity manager?

The answer may surprise you. But before we get to that, a bit of background on both.

My daughter has been recently bugging my wife and me for an Apple iPhone these past several months—primarily because so many of her classmates already have one. This request of hers made me realize just how extensively the Apple brand has penetrated households worldwide over the past few decades. And it's not just Apple—the impact that a handful of U.S. mega-cap companies have had on consumers and investors alike during this timeframe is truly remarkable.

Case-in-point: In six of the last eight calendar years, the Russell 1000® Growth Index and the Russell Top 50® Mega Cap Index have outperformed the Russell 1000® Index by an average of 3.15% and 1.34% annualized, respectively. And while we saw a retrenchment in 2022 from this set of mega-cap growth stocks—due to multiple contractions from rising interest rates—the group has roared back with a vengeance this year. For instance, through May 31, NVIDIA, Meta, Tesla, Amazon, Alphabet, Microsoft, and Apple are all up over 36%.