13 January 2020
The rise and rise of large caps
The S&P 500’s ten largest companies’ combined market capitalisation is now more than three times that of the entire Russell 2000 index of US small cap companies. This is the highest it has been in 50 years and each peak typically happens at the end of a decade.
Within the context of S&P 500, the percentage share of the top 10 companies of the index at 22 per is approaching highs seen in the 2000s. There are a number of reasons for this extraordinary performance including monopolistic financial performance based on network effects, extremely loose monetary policy and the rise of passive funds. But that could be about to change.
History shows that the track record of mega cap companies maintaining their status at the top of the S&P leader board from one decade to another is, at best, average. The top 10 list typically changes by at least 50 per cent over the following decade as the drivers of performance alter significantly and new trends emerge.
Table 1: Yesterday’s winners? The list of top companies changes from decade to decade
Source: Fidelity International, January 2020
Focus on small and mid-cap
Already many investors are on the hunt for the companies that will form the next top ten in the S&P 500 in the 2020s. But we believe that a more prudent strategy would be to focus on smaller and mid-sized companies at this point in the latest “mini” cycle of this multi-year bull market, avoiding both the overvaluation and concentration risk in the larger cap area while also benefiting from the emerging long-term structural trends fuelling corporate growth lower down the scale.
The recent jump in the ISM Manufacturing Index, which is closely tied to the performance of small caps, and signs of a truce in the US-China trade war bode well for these domestically-oriented companies. Indeed, there are signs of improving risk sentiment: the Russell 2000 hit new highs in December but remains largely undervalued compared to large caps. And if the global economy picks up, these companies stand to do much better than the broader market.
Source: Strategas Partners, December 2019
While it may be difficult to envisage today how or why mega caps will underperform given their sustained rise or which of these companies will be replaced by others, continuing to invest in them as a group risks missing out on better value elsewhere, as well as evolving trends. The view that “this time is different” may not hold. After all, it is brave to bet against the crowd but braver to bet with the future.
This document is for Investment Professionals only and should not be relied on by private investors.
This document is provided for information purposes only and is intended only for the person or entity to which it is sent. It must not be reproduced or circulated to any other party without prior permission of Fidelity.
This document does not constitute a distribution, an offer or solicitation to engage the investment management services of Fidelity, or an offer to buy or sell or the solicitation of any offer to buy or sell any securities in any jurisdiction or country where such distribution or offer is not authorised or would be contrary to local laws or regulations. Fidelity makes no representations that the contents are appropriate for use in all locations or that the transactions or services discussed are available or appropriate for sale or use in all jurisdictions or countries or by all investors or counterparties.
This communication is not directed at, and must not be acted on by persons inside the United States and is otherwise only directed at persons residing in jurisdictions where the relevant funds are authorised for distribution or where no such authorisation is required. Fidelity is not authorised to manage or distribute investment funds or products in, or to provide investment management or advisory services to persons resident in, mainland China. All persons and entities accessing the information do so on their own initiative and are responsible for compliance with applicable local laws and regulations and should consult their professional advisers.
Reference in this document to specific securities should not be interpreted as a recommendation to buy or sell these securities, but is included for the purposes of illustration only. Investors should also note that the views expressed may no longer be current and may have already been acted upon by Fidelity. The research and analysis used in this documentation is gathered by Fidelity for its use as an investment manager and may have already been acted upon for its own purposes. This material was created by Fidelity International.
Past performance is not a reliable indicator of future results.
This document may contain materials from third-parties which are supplied by companies that are not affiliated with any Fidelity entity (Third-Party Content). Fidelity has not been involved in the preparation, adoption or editing of such third-party materials and does not explicitly or implicitly endorse or approve such content.
Fidelity International refers to the group of companies which form the global investment management organization that provides products and services in designated jurisdictions outside of North America Fidelity, Fidelity International, the Fidelity International logo and F symbol are trademarks of FIL Limited. Fidelity only offers information on products and services and does not provide investment advice based on individual circumstances.
Issued in Europe: Issued by FIL Investments International (FCA registered number 122170) a firm authorised and regulated by the Financial Conduct Authority, FIL (Luxembourg) S.A., authorised and supervised by the CSSF (Commission de Surveillance du Secteur Financier) and FIL Investment Switzerland AG, authorised and supervised by the Swiss Financial Market Supervisory Authority FINMA. For German wholesale clients issued by FIL Investment Services GmbH, Kastanienhöhe 1, 61476 Kronberg im Taunus. For German Institutional clients issued by FIL (Luxembourg) S.A., 2a, rue Albert Borschette BP 2174 L-1021 Luxembourg.
In Hong Kong, this document is issued by FIL Investment Management (Hong Kong) Limited and it has not been reviewed by the Securities and Future Commission. FIL Investment Management (Singapore) Limited (Co. Reg. No: 199006300E) is the legal representative of Fidelity International in Singapore. FIL Asset Management (Korea) Limited is the legal representative of Fidelity International in Korea. In Taiwan, Independently operated by FIL Securities (Taiwan ) Limited, 11F, 68 Zhongxiao East Road., Section 5, Xinyi Dist., Taipei City, Taiwan 11065, R.O.C Customer Service Number: 0800-00-9911#2 .
Issued in Australia by Fidelity Responsible Entity (Australia) Limited ABN 33 148 059 009, AFSL No. 409340 (“Fidelity Australia”). This material has not been prepared specifically for Australian investors and may contain information which is not prepared in accordance with Australian law.