• Introduction: “Behemoths Have Dominated the Market Before, but Tech is Different,” WSJ, June 15, 2018 1
  • The 5 Largest Firms, “The Nifty-Five”, from Naïve to Nefarious?
  • A Study of the Tails, “The Nifty Five” vs. “The Minnows”
  • Fundamental Metrics of “The Nifty Five” vs. “The Minnows”
  • Conclusion: Mining Among “The Minnows”
  • Exhibit
  • Appendix: Incremental Thoughts on The Nifty Five

Introduction: “Behemoths Have Dominated the Market Before, but Tech is Different,” WSJ, June 15, 2018

We read the above article in Friday’s Wall Street Journal with great interest as Kailash Capital had very recently completed some analysis on exactly the issue so thoughtfully addressed by James Mackintosh. In the article Mr. Mackintosh notes that the 5 largest companies in the S&P 500 now represent an uncommonly large weight in the index. In our opinion his approach was as even-handed as an article dealing with such a bimodal issue could be. The partners at Kailash Capital and the partners of our product have to take views and make active decisions for the investors’ money we represent. In our case, we tend to hew to what history has to teach and act accordingly. Simplistically, our analysis of history indicates that the fundamental case for owning the 5 largest firms today has only been more tenuous and risky in the months leading up to the peak of the internet bubble.

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The 5 Largest Firms, “The Nifty Five”, from Naïve to Nefarious?

One of the hallmarks of this relentless bull-market has been that from 2009 through the end of 2014, the rally off the 2009 lows was fairly broad based with the largest 5 stocks representing an uncommonly small proportion of the index. Since 2015 however, the market has experienced a dramatic increase in concentration among the 5 largest stocks turning them into a modern day “Nifty Five.” In Figs. 1 and 2 below we show that the percent of the R1000 represented by the 5 largest firms, the “Nifty Five,” is approaching levels last seen during peak of the tech bubble and is now north of a 2 sigma event.2 At the peak of the tech bubble, the Nifty Five represented 15.8% of the R1000’s market cap. Today, the Nifty Five represents 13.7% of the index and has been rising rapidly much like we saw in the internet bubble.

  1. As a reminder for our Financial Advisors: our models are available on a continuous basis, and most have been in production for over a decade.  If you are looking for simple, concentrated, low turnover, and tax efficient model portfolios we would like to talk with you.  KCR also offers a wide range of easy-to-use but sophisticated tools.  Our toolkits can help identify mispriced stocks with the best and worst risk/reward characteristics, estimate a stock’s duration and warn you when a company is engaging in low-quality accounting. Over the last 12 years, KCR has built and offers time-tested and class-leading products built by experienced and proven money managers for fixed to low prices.
  2. Kailash Capital’s sister company, L2 Asset Management, runs market neutral, long/short, large-cap, and mid-cap long-only portfolios with a value and quality bias.  L2 employs a highly disciplined investment process characterized by moderate concentration, low turnover, high tax efficiency, and low fees. While nobody can predict the future, we believe the recent resurgence in risk-adjusted returns seen across all products is the beginning of what may be a long period where speculation is punished, and prudence and patience rewarded.


The information, data, analyses, and opinions presented herein (a) do not constitute investment advice, (b) are provided solely for informational purposes and therefore are not, individually or collectively, an offer to buy or sell a security, (c) are not warranted to be correct, complete or accurate, and (d) are subject to change without notice. Kailash Capital, LLC and its affiliates (collectively, “Kailash Capital”) shall not be responsible for any trading decisions, damages or other losses resulting from, or related to, the information, data, analyses or opinions or their use. The information herein may not be reproduced or retransmitted in any manner without the prior written consent of Kailash Capital. In preparing the information, data, analyses, and opinions presented herein, Kailash Capital has obtained data, statistics, and information from sources it believes to be reliable. Kailash Capital, however, does not perform an audit or seeks independent verification of any of the data, statistics, and information it receives. Kailash Capital and its affiliates do not provide tax, legal, or accounting advice. This material has been prepared for informational purposes only and is not intended to provide, and should not be relied on for tax, legal, or accounting advice. You should consult your tax, legal, and accounting advisors before engaging in any transaction. © 2021 Kailash Capital, LLC – All rights reserved.

Nothing herein shall limit or restrict the right of affiliates of Kailash Capital, LLC to perform investment management or advisory services for any other persons or entities. Furthermore, nothing herein shall limit or restrict affiliates of Kailash Capital, LLC from buying, selling or trading securities or other investments for their own accounts or for the accounts of their clients. Affiliates of Kailash Capital, LLC may at any time have, acquire, increase, decrease or dispose of the securities or other investments referenced in this publication. Kailash Capital, LLC shall have no obligation to recommend securities or investments in this publication as result of its affiliates’ investment activities for their own accounts or for the accounts of their clients.

June 2, 2018 |

Categories: White Papers

June 2, 2018

Categories: White Papers

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