Strategies for Markets in Transition

 

Active Management in a Period of High Concentration

S&P 500 concentration last peaked in 2000. Could history be repeating itself? Marco Pirondini, Head of US Equities, discusses familiar patterns in the current market environment.

 

Concentration in US Equity Markets last peaked in 2000. What followed?

Passive exposure to large-cap growth has been a popular choice among long-term investors. We believe that shifting market conditions, and a look back at the last time concentration peaked in 2000, should prompt investors to reassess and consider active strategies.

In a recent study, 62% of active large-cap funds outperformed the market year-to-date. Nearly 70% were ahead of their benchmarks in May alone.1 With US equity market concentration having peaked in 2020, active managers may have an advantage and the flexibility to seek opportunities during this rotation.

Historic market data can be used to draw parallels and inform decision-making (noting that, of course, past performance is no guarantee of future results). Looking back, which period is the current market emulating, and what can we learn from it?

Source: Amundi, Bloomberg. Data as of March 31, 2021. Top 5 stocks are not meant to represent any current or future holding of an Amundi portfolio and should not be considered recommendations to buy or sell any security.

 

We believe the concentrated environment we experienced in 2000 is similar today, and may provide a tailwind for active managers for some time.

 

 

Who is best positioned to take advantage of this?

Our view is that the high concentration levels in the Index can provide active managers an opportunity to offer more diversified6 exposure to large-cap growth, and in the process pursue stronger risk-adjusted returns than the S&P 500 Index over time.

We believe the current rotation could continue without a disruption, similar to what investors experienced following the Dot-com bubble.

Marco Pirondini, Head of Equities, Portfolio Manager

Currently, return dispersions are elevated and correlations are trending down, both of which, historically, have been favorable for active managers relative to their benchmarks. 

A steepening yield curve, pushing up the cost of capital, has initiated a pivot away from hyper-growth stocks in the S&P 500. These stocks had been the drivers of passive outperformance over the past 10 years.

As an active manager, we have the ability to target multiple sectors and industries to seek and capitalize on potential macro opportunities. This broad scope allows our investment teams to target the specific areas of the market that they believe offer the greatest opportunities in ever-changing market environments.

Active managers that integrate Environmental, Social and Governance (ESG) principles into their analysis may have an additional edge in this environment.  

There is increasing investor focus on ESG investment alternatives. Active managers have a greater ability to assess companies’ ESG risks and their ability to improve their ESG profiles over time. These important aspects of identifying and promoting sustainable and socially responsible investing may be less possible in systematically managed passive investment vehicles.

1Bloomberg, Active Funds Crushed Equity Benchmarks in May Like Never Before, June 3, 2021. Study by BofA US Equity & Quant Strategy, Lipper Analytical Services.

2 The S&P 500 Index measures the performance of the broad US stock market. Indices are unmanaged and their returns assume reinvestment of dividends and, unlike mutual fund returns, do not reflect any fees or expenses associated with a mutual fund. It is not possible to invest directly in an index.

Source: Amundi, Bloomberg. Data as of March 31, 2021.

4 Top 5 refers to ‘FAANG’ stocks, an acronym of five prominent American technology companies: Facebook, Amazon, Apple, Netflix; and Alphabet (formerly known as Google).

5 Source: Bernstein Quant services. Active manager performance data is from Morningstar. Fund returns data is as of 28 February 2021.

Diversification does not assure a profit or protect against loss.

 

1 Out of 536 (3-Year) and 486 (5-Year) Lipper Large-Cap Core Funds Classification. Based on historical risk-adjusted returns of Class Y shares, relative to peers as of 11/30/2020. For more information about Lipper Fund Awards from Refinitiv, including methodology please see  Pioneer Fund Lipper Awards Flyer

Refinitiv Lipper Fund Awards United States 2021. ©2021 Refinitiv. All rights reserved. Used under license.

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