By
Borsgade
In their latest article, Michael J. Mauboussin and Dan Callahan explore the question of stock market concentration.
They explain that stock market concentration has increased sharply over the past decade, creating a challenging environment for active managers and also raising unease about the loss of diversification, the valuations of the largest stocks, and the effect of flows into index funds.
They look at concentration over the past 75 years to see where we stand today and to reflect on what it means for active equity managers and examine which companies have had the largest stock market capitalizations and how that population has changed.
They ask whether there is a correct level of concentration, both by comparing the U.S. to other global markets and by presenting the possibility that concentration was too low in the past and seek to determine whether fundamental corporate performance supports the current increase in concentration.
Owning the stock of the largest company has historically been a poor investment relative to the market overall until about a decade ago. Owning the second and third largest stocks produced excess returns from 1950 to 2023. However, all three of the top stocks have provided stellar relative returns from 2014 to 2023. Where we go from here is anyone’s guess, but assessments of sustainable competitive advantage and growth will be central to determining that path.
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