Equity markets’ concentration risk is not limited to just indices like the S&P500 and Russell 1000 – fundamental factors are concentrated and crowded. We used commercially available Style Analytics tools to establish that:

  • Momentum, Low Volatility, Growth and Quality are more concentrated now than over the past decade.
  • Top 10 Momentum and Growth stocks are responsible for 45% and 43% of those factors’ 100 best performing stocks, respectively.
  • Apple, Amazon and Microsoft are in the top 10 stocks for three different factors.
  • Value is much less concentrated, with 25% of the top 100 returns coming from just 10 stocks.
  • Value does not have overlapping stocks, so may offer concerned investors a natural diversification.

Concentrated – sweet ‘n sour

Market concentration, in which just a few stocks are responsible for a big portion of major index’s returns, has been widely reported about popular indices in recent months. It turns out that fundamental factors also show strong concentration: the returns of investment styles like Growth, Value, Quality and Momentum all exhibit strong concentration in just a handful of their constituents. For instance, over the past 4 months of market recovery, the top 10 Growth stocks have been responsible for as much as …

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