Big and small in IT: Overcoming the advantages of giants and the potential of small businesses
Just as the entire world does not move to the beat of a drum, there are differing views on whether this mega-cap technology leadership will continue.
But advisors who believe the trend will continue say there’s a reason why mega-cap stocks are so popular. According to Morningstar, 17 of the top 20 companies in the S&P 500 are characterized by high network effects, large amounts of intangible assets, cost advantages, high switching costs, or efficient scale that provides a competitive advantage. It has a wide economic moat. 5 Also, over the past year, revenue growth for the top 20 companies was 14.8% for the top 20 companies, compared to 4.07% for the next 480 companies in the index. 6
Combine these trends with the fact that the average US asset manager’s Moderate Model Allocation and the average active US Large Blend fund have a significant underweight to mega-cap stocks7. Given this, some advisors may see this as an opportunity to add more mega-cap exposure to their portfolios.
But higher returns from larger companies also come with higher risks, and some advisors are now rethinking their allocations. Compared to the more diversified S&P 500, the top 20 portfolio has had higher overall risk over the past five years. 8 In addition, small and medium-sized enterprises may benefit more from innovation through new technologies, and revenue growth may justify further investment. . In fact, based on a BlackRock study of more than 23,000 portfolios, advisors overweight small-cap stocks by up to 5-6% in their equity allocations compared to broader stock market benchmarks.9 Advisors with this view may consider further diversification away from mega-cap stocks. Give it a name and raise awareness of your small business.
Regardless of their view, advisors should consider becoming more intentional with their exposure to U.S. equities in this environment.
