2023: The year of mega caps?!

• Mega caps now have a greater weight in the global equity market than the four smallest sectors combined.
• If the Top 10 stocks are excluded, global equity indices show a clear size bias as well as increased leverage and lower profitability.
• Even when corrected for all factor effects, a significant, purely idiosyncratic mega cap effect emerges, especially in 2023.

Dominance of mega caps

As we showed in the last Equity Insights #30, the concentration in the global stock market is higher than at any time since 2000. Figure 1 shows the current extent of the concentration. Apple has a greater weight in the global stock market than the energy, basic materials, utilities or real estate sectors. If one were to add up the seven largest individual stocks, their index weight of 18.5 per cent would clearly exceed the combined weight of the four sectors shown, at 14.0 per cent.

Fig. 1: Global mega caps and sectors

However, the question arises as to what the reasons are for this increasing dominance in 2023. Is it purely due to the performance of the top 10 stocks compared to the rest of the index – an idiosyncratic mega cap effect, so to speak (Equity Insights #30)? Or does the factor profile of the remaining index stocks (index ex Top 10) have such a negative effect relative to the original index that the ratio of market capitalisations develops increasingly unfavourably?

Factor profile ex Top 10

Figure 2 shows the factor profile of the global equity market ex Top 10 relative to the global equity market – referred to below as the Index ex Top 10 portfolio. On the basis of a normalised scaling, it can be observed that the present portfolio has an above-average performance in terms of size. In addition, there are positive values for the factors value, dividend and risk (volatility & beta), although some of the values are 0.1 or less and should therefore not have a significant influence on the performance. On the other hand, there are negative values for the factors profitability, leverage and momentum.

Fig. 2: Factor profile: Index ex Top 10 relative to the global stock market

Zusammengefasst lässt sich festhalten, dass die Top 10-Aktien ge­gen­über dem restlichen Index höher bewertet sind und weniger Divi­dende zahlen. Allerdings weisen sie eine geringere Verschul­dung auf, sind profitabler und haben sich – wenig überraschend – besser entwickelt bei einem höheren Risiko (Volatilität & Beta).

Für eine nähere Analyse der Auswirkungen des Faktorprofils wird die relative Wertentwicklung des Index ex Top 10-Portfolios der Wertentwicklung kontrollierter Faktorstrategien für das Jahr 2023 gegenübergestellt. Kontrolliert impliziert, dass die jeweilige Fak­torstrategie relativ zum globalen Aktienmarkt ausschließlich diIn summary, the Top 10 stocks have a higher valuation than the rest of the index and pay lower dividends. However, they have lower leverage, are more profitable and, unsurprisingly, have outperformed with higher risk (volatility & beta).

For a more detailed analysis of the impact of the factor profile, the relative performance of the index ex top 10 portfolio is compared with the performance of controlled factor strategies for the year 2023. Controlled means that the respective factor strategy, relative to the global equity market, only exhibits the desired factor characteristics and no relative deviations with regard to the remaining factors or the sector and country allocation.

As shown in Table 1, the Index ex Top 10 portfolio lost 5.4 percent against the global equity market. This underperformance can be partly attributed to the effects of the factor profile presented, as can be seen from the performance of the individual factors.

Tab. 1: Performance of the Index ex Top 10-portfolio & controlled factor strategies relative to the global stock market

Assenagon Equity Framework

The fact that the factor profile has an influence on the relative performance is immediately clear when analysing Table 1 in combination with Figure 2. However, it is noticeable that all factor strategies as well as the Index ex Top 10 portfolio underper­formed the global equity market in 2023, which suggests a pronounced mega cap effect. In order to differentiate between 
a pure mega cap effect and the possible influence of the factor profile, a controlled index ex top 10 portfolio is used for the analysis in addition to the uncontrolled index ex top 10 portfolio.

Tab. 2: Relative performance compared to the global stock market

As Table 2 shows, the relative performance of the index ex Top 10 portfolio is influenced not only by the deviating factor profile but also by the "absence" of the Top 10 stocks. In the case of the controlled index ex Top 10 portfolio the performance is exclusive­ly influenced by the Top 10 stocks. Therefore, a clear distinction can be made between the two effects.

Fig. 3: Relative performance compared to the global stock market
(December 2022 – July 2023)

For the investor

Figure 3 shows that the difference in performance between the uncontrolled and controlled index ex Top 10 portfolio is approx. 1.4 percent. Thus, the return effect of the factor portfolio, which is created by excluding the Top 10 stocks, is manageable overall. However, the idiosyncratic mega cap effect clearly prevails: the controlled index ex Top 10 portfolio underperforms the original index by about 4 percent.

Although the idiosyncratic mega cap effect has little impact on performance over a long period of time (Equity Insights #30), the current year was the first time in over 20 years when there was no opportunity to substitute the top 10 stocks without a noticeable return effect.

PS: Read about how equal weight factor portfolios differ from market cap weighted portfolios in the next edition of Equity Insights.