Nicholas J. Paul
INSTITUTIONAL PORTFOLIO MANAGER
Historically, an allocation to the large-cap growth category of the equity asset class, as represented by the Russell 1000 Growth Index, has presented investors with a reasonable opportunity to gain exposure to mid-cap stocks, which, for this analysis, are defined as companies with a market capitalization between $2 billion and $25 billion1 as illustrated in Exhibit 2. The advantage of this inefficiency within the asset class is that it may help to diversify a portfolio, at least from a market capitalization standpoint. However, due primarily to the strong performance of a handful of technology stocks (and their ensuing increase in market capitalization) within the Russell 1000® Growth Index, today’s large-cap growth investor may be less able to gain mid-cap exposure through the traditional large-cap growth allocation (as shown in Exhibit 1).
In our view, the dominance of the most influential large-cap stocks can be better appreciated when viewed from the perspective of market-capitalization buckets, as illustrated in Exhibit 2, where exposure to mid-cap stocks in the Russell 1000® Growth Index has declined from 39% of that index in 2010 to just 10%, as of 12/31/20. Also worth noting is where this percentage change was reallocated: what we have observed is a significant increase in stocks with a market capitalization greater than $300 billion in the index.
While from a market capitalization perspective there has been a lack of diversification experienced by the index, it’s important to point out that this one-dimensional shift in the market cap exposures that has added an additional layer of concentration risk where, as illustrated above, over 47% of the Russell 1000® Growth Index is focused on those companies with a market valuation of over $300 billion. Exhibit 3 puts it all in perspective. In 2010, Facebook was not even a publicly traded company (IPO: May 2012), but as of December 31, 2020, it’s the fifth-largest company in the index, behind only Apple, Microsoft, Amazon and Alphabet.
Conclusion
While the market caps for the largest growth companies have accelerated dramatically since mid-2016, outpacing mid-caps, how this trend is likely to progress is uncertain. However, what we do know is that an allocation to large-cap growth today provides far less exposure to companies further down the capitalization spectrum, and as such, a dedicated allocation to mid-cap growth may prove a key component of a comprehensive asset allocation framework moving forward.
In any market environment, we strongly believe that investors should stay diversified across a variety of asset classes. By working closely with your financial advisor or investment professional, you can help ensure that your portfolio is properly diversified and that your financial strategy supports your long-term goals, time horizon and tolerance for risk. Diversification does not guarantee a profit or protect against loss.
The information included above as well as individual companies and/or securities mentioned should not be construed as investment advice, a recommendation to buy or sell or an indication of trading intent on behalf of any MFS product.
Endnotes
1 Companies with a market capitalization between $2 billion and $25 billion account for 80% of the constituents in the Russell Midcap® Growth Index, as of 12/31/20.
The Russell 1000® Growth Index measures US large-cap growth stocks.
The Russell Midcap® Growth Index measures U.S. mid-cap growth stocks. It is not possible to invest directly in an index. Past performance is no guarantee of future results.
Frank Russell Company (“Russell”) is the source and owner of the trademarks, service marks and copyrights related to the Russell Indexes. Russell® is a trademark of Frank Russell Company. Neither Russell nor its licensors accept any liability for any errors or omissions in the Russell Indexes and/or Russell ratings or underlying data and no party may rely on any Russell Indexes and/ or Russell ratings and/or underlying data contained in this communication. No further distribution of Russell Data is permitted without Russell’s express written consent. Russell does not promote, sponsor or endorse the content of this communication.
The views expressed in this commentary are those of the author and are subject to change at any time. These views should not be relied upon as investment advice, as securities recommendations, or as an indication of trading intent on behalf of any other MFS investment product. No forecasts can be guaranteed.