- Introduction: The Herd Runs Rampant
- Performance, Size and Value: When They Coincide It May Signal the End of the Ride
- Should History Rhyme, Allocators May be Wise to Rotate to Smaller Size
- Conclusion: Simple but Not Easy, The Pain of Breaking from the Herd
- Exhibit
Introduction: The Herd Runs Rampant
From the end of 2016 through the end of January this year the S&P500 has risen 53% with nearly 30% of that total coming from the index’s five largest stocks. These five leviathans put up average returns over the period of over 150% and closed the month of January out with a combined market cap of over $5.5 trillion USD or north of 25% of total US GDP.1 Kailash has written about this issue in A Market Cap Concentration Flag Part I and Part II and broadly expanded upon the relationship between market cap to GDP, Buffett’s favorite valuation metric, in Better a Seller than a Buyer Be.
For investors in the S&P500, being underweight much less omitting one of those big five firms has created brutal performance headwinds. Kailash, academics and dusty history books have repeatedly attempted to teach investors that following the herd, particularly at extremes, is a most unprofitable enterprise. This paper seeks to expand upon that concept by looking at opportunities in places that, while objectively obvious, investors have clearly forgotten.
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Figure 1 below shows that the concentration effect within the S&P500 has radiated out into the broader equity universe in a manner only seen once before. The chart below plots the sum of Russell 2500’s constituent market caps and divides it by the sum of the S&P500’s constituent market caps. Rarely has the world seen Small & Mid Cap stocks represent such a small proportion of the overall economic value ascribed to the publicly traded portion of corporate America. While possibly early, Kailash believes a foundation that may underpin many of the next decade’s winning strategies lies in the simple chart below.
Disclaimer
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February 12, 2020 |
| Authors: Matthew Malgari, Nathan Przybylo, Dr. Sanjeev Bhojraj and John Durkin
February 12, 2020
Authors: Matthew Malgari, Nathan Przybylo, Dr. Sanjeev Bhojraj and John Durkin