Underperforming Growth Managers Showed Skill
The U.S. equity market's "Magnificent Seven"1 surged to a 27% weight in the MSCI USA Index in July 2023, up from 7% a decade ago. The concentration is even more conspicuous within the MSCI USA Large Cap Growth Index, for which the same seven companies now make up 55%.
In the middle of the last decade, from 2013 until mid-2017, when the cumulative weight of the Magnificent Seven was modest, their median weight in U.S. large-cap growth managers' portfolios closely mirrored the benchmark, the MSCI USA Large Cap Growth Index. But as the index weight of these stocks climbed, nearly all active growth managers began to underweight them. Managers may have had several motivations, such as low conviction in their performance prospects and the desire, or the regulatory requirement, to mitigate concentration risk.
Active bets often offset underweights in the Magnificent Seven
Underweight positions in the Magnificent Seven have been a drag on growth managers' performance relative to their benchmarks over the 10 years ending March 2023. Yet, nearly two-thirds (63%) of growth managers partially or more than offset this negative contribution with active bets on other stocks.
The headline performance of an active manager relative to their benchmark does not tell the whole story. A manager's skill can be revealed by understanding their active bets in the context of high levels of market concentration. Thus, assessing an active manager on their prioritization of concentration risk over tracking risk can be prudent in markets where concentration is elevated.
Large-cap growth managers underweighted the Magnificent Seven as the stocks’ index weight climbed
The range represents the 1st and 99th percentiles of active weights across 122 active large-cap growth managers. Data is from March 2013 through March 2023.
Majority of growth managers showed skill in active bets, offsetting drag from Magnificent Seven underweight
Return contribution from active positions for 122 large-cap growth managers relative to the MSCI USA Large Cap Growth Index for the period March 2013 to March 2023.
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1 The seven companies are Alphabet Inc., Amazon.com Inc., Apple Inc., Meta Platforms Inc., Microsoft Corp., NVIDIA Corp. and Tesla Inc. For the analysis, we consider Alphabet A and Alphabet C as one stock.
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