Going all-in on big tech
However you slice the market, the strategies that have been winning mostly rely on a few big names
Factor investing is one of the most interesting ways to look at what’s going on in stockmarkets and what kind of environment we are in. While groups of stocks with certain characteristics have tended to beat the wider market over the long term, there are frequent ups and downs that can tell us a great deal. Take the size factor: small stocks have outperformed large caps over time, but there have been long periods when they lagged – and the last few years have been one of them, as we discussed recently (see issue 1998).
We can similarly look at value versus growth (cheap stocks have beaten faster-growing ones over time, but with frequent reversals); highquality versus low quality (quality is typically defined as high return on equity, stable earnings and low debt); or other traits such as momentum – the tendency for stocks that have been going up over the past few months to keep going up.
Value still isn’t back
The chart shows a total return index for each of these three factors relative to the MSCI World index, starting in 1994. At each point, if the line is going up, the factor is outperforming the MSCI World. If it’s going down, it’s underperforming.
You can see that while value is often viewed as a reliable source of outperformance if your horizon is long enough, it has now cumulatively underperformed the overall index over the past 30 years. The past decade has been a tough time in which it has given back much of its relative outperformance. You can also clearly see past short spells when value did poorly (the dotcom bubble) and well (the years before the global financial crisis), and also note that the apparent value revival after the pandemic has faltered.
Relative total return, rebased June 1994 = 1 3
2.5 2 1.5 1 0.5 0
Quality Momentum Value
On the other hand, quality and momentum have outperformed but in very different ways. Quality has been steady, which is why it’s popular as a way to make portfolios defensive. It underperformed in the mid 2000s (quality stocks were still making gains – just less than lowerquality stocks) but has done very well since then.
Momentum always looks very attractive. Its key weakness is very high turnover: one must be sceptical about whether historical results from momentum indices could have been achieved considering how high trading costs used to be. It’s also prone to sharp reversals during bear markets – look at the big spikes and drops in 2000, 2003 and 2008, which can be unsettling. Still, it has had an exceptional decade and coped very well in the pandemic. Performance slipped in 2021-2023 (again, this is relative – it still made gains in 2021 and 2023, just less than the overall market), but has come back strongly in the past few months.
However, on a cautionary note, dig into the top holdings in quality, momentum and growth right now and you’ll notice a lot of overlap. There’s the Magnificent Seven, some similar stocks and a few other hot growth themes (eg, Novo Nordisk and Eli Lilly). Concentration is high: the top ten covers 35-40% of each index. In short, everything that is working is focused on a very narrow set of investments (see right). If the tech boom falters, we are looking at a very different kind of market.