Mega cap concentration opens up opportunities for investors on the stock market

• The unprecedented dominance of tech giants in the stock market poses challenges for investors
• Assenagon's quantitative analysis shows: Excluding mega caps significantly reduces returns
• Balanced allocation is the key to long-term success

The growing concentration in the global equity market is being further fueled by the strong rally in mega caps. For example, the three largest companies in the MSCI World Index (Apple, Microsoft and Nvidia) currently have a greater weighting than the three sectors of energy, commodities and utilities. This market development leads to new challenges for investors who are looking for diversification and at the same time want to keep an eye on the performance of established factor strategies.

The so-called mega caps have an enormous influence on the return and risk of equity portfolios. "The concentration of mega caps poses a particular challenge for investors, as it has a significant impact on the risk/return profile," explains Dr. Ulrich Wessels, Director Institutional Sales at Assenagon. "Our systematic quantitative analysis shows that the exclusion of mega caps has led to a significant reduction in returns over the last few years - across all factors examined," adds Daniel Jakubowski, Head of Equity Portfolio Management.

A question of balance

However, the high valuation of mega caps also opens up opportunities for investors. Assenagon's quantitative analyses show that a balanced exposure to mega caps not only promotes a diversified portfolio structure, but also enables positive returns in various factor strategies. The momentum and profitability factors in particular have generated excess returns over the last five years through the inclusion of mega caps.

"The right balance between mega caps and other market segments is the key to a successful investment strategy," says Jakubowski. An excessive underweighting of these stocks can significantly reduce market participation.

Further details on the mega cap effect and its impact on various strategies can be found in the latest issue of Assenagon Equity Insights.

Munich, October 22, 2024