Introduction

Investors in US equities face a paradox. The market has recently reached historic levels of industry concentration — a characteristic often associated with future expected underperformance. Yet the large cap technology stocks that now dominate indices exhibit a high-beta profile, which would typically (all else being equal) suggest stronger expected returns. In addition, ‘stock-specific’ idiosyncratic risk has significantly increased, while factor exposures in today’s market differ significantly from historical patterns, following an extended period of underperformance for academically established premia such as Size and Value; these developments have created performance obstacles and raised questions over the need for strategic changes. With all of these challenges in mind, we cannot ignore today’s broader environment, particularly the heightened risk of market correction. Difficult conditions call for vigilance. Investors can scrutinize the concentration, factor and sector exposures of equity portfolios directly, not only to explain recent performance but to determine whether changes may now be required.

Author

Shahyar Safaee
Deputy CEO and Business Development Director,
Scientific Portfolio

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