Scientific Beta

In this paper, we look at historical patterns of market concentration and returns to concentrated versus diversified equity portfolios and discuss the implications of this evidence for investors.

Market concentration in US equities has reached extreme levels not seen since the 1960s, with the top ten stocks now accounting for a third of the market index. In recent years, a small number of mega-cap stocks have disproportionately driven benchmark returns. Their strong performance has led many investors to follow this trend by investing in "Magnificent Seven", "Top 50" and other mega-cap investment strategies.

While the market turmoil in April affected overall stock prices, it did not change the pattern of extreme concentration. The outperformance of these stocks has been less pronounced over the past six months but has not yet reversed.

Meanwhile, more diversified strategies that follow the adage "don't put all your eggs in one basket" and avoid concentration in mega-cap stocks have underperformed in recent years, raising concerns among investors about the benefits of diversification.

Is the current extreme level of market concentration a signal to abandon diversified equity portfolios? Or is it an opportunity to move away from mega-caps to outperform the market in the future? No one knows for sure, but more than 50 years of data provide some insights. We look at historical patterns of market concentration and returns to concentrated versus diversified equity portfolios and discuss the implications of this evidence for investors.