Mega cap investments and diversification - how investors manage the balancing act on the stock market
- Rigorous exclusion of mega caps falls short
- Deliberately overweight or underweight heavyweights in the equity market
- Minimize risks and benefit from opportunities through systematic integration
In view of the high weighting of mega caps in global equity indices, it is currently often recommended to diversify by completely excluding heavyweights such as Google, Apple and Nvidia from the portfolio. However, instead of rigorously excluding mega caps from the portfolio construction, investors can actively manage the risk in relation to the benchmark - namely by specifically underweighting or overweighting the tech giants.
"Our analyses show that mega caps can be sensibly integrated into a factor-based portfolio strategy despite their dominant position in the markets," explains Daniel Jakubowski, Head of Equity Portfolio Management at Assenagon. "Through strategic weighting, individual stock risks can be minimized without sacrificing growth opportunities."
Integration of mega caps in the factor portfolio
According to Jakubowski, the inclusion of mega caps is crucial in order to adequately reflect the current market structure. Together with his team, the fund manager uses a systematic quantitative investment approach to analyze global equities based on several factors, such as value, momentum and profitability, and weights the mega caps according to their specific characteristics. This avoids undesirable risks and at the same time exploits potential.
"By taking all value-driving factors into account as part of the portfolio construction, mega caps can also be integrated into value-oriented strategies, such as a global value strategy," explains Dr. Ulrich Wessels, Director Institutional Sales at Assenagon.
Minimizing risks while keeping opportunities open
In view of the increasing concentration on the global equity market, the two experts recommend the targeted integration of mega caps into existing portfolios. A deliberate weighting can help to minimize individual stock risks and benefit from the specific characteristics that currently characterize mega caps.
Further information on the comprehensive investment strategies and their performance analyses can be found in the latest issue of Assenagon Equity Insights.
Munich, November 7, 2024