The outperformance of the Global Titans index – which comprises 50 of the world’s largest stocks – relative to the broader global equity index has reached record highs, according to research from Downing’s Alex Paget, who warns the recent flock to mega caps will be viewed by future generations as “collective hysteria”.
Paget, a fund manager across the Downing Fox multi-manager strategies, said the Global Titans index has returned 36.9% over 12 months to February, almost exactly doubling the gains of the global equity index. This marks the biggest proportional outperformance of the ‘Titans’ over a single year on record, with the 50 largest companies having now outperformed their smaller counterparts for 14 years.
At the same time, price-to-earnings ratios of the 50 Titans are at 20-year highs relative to global equities, while only 2.5% of active managers have managed to outperform the Global Titans index over the last 12 months.
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Paget also warned that mega-caps reigned supreme at the end of the tech bubble in 2000, as well as in the 1970s before a bear market reared its head.
“As the old saying goes, history doesn’t repeat itself, but it often rhymes,” he wrote in an analysis piece for Downing. “We have seen periods in the past where it seemed futile to invest in anything other than the world’s biggest companies, but this domination of mega caps has never continued indefinitely.
“When the market dynamics have shifted in the past, it has led to large falls in capital value. Given this mega-cap trend has been going for close to 14 years now, we suspect we are getting closer to that turning point, and when it occurs and the market isn’t the narrow beast it is today, we believe, like the period between 2000 and 2007, it will be a much more fruitful hunting ground for active managers.”
Outperformance
The fund manager added that, among this handful of large stocks, there is little sector diversification – with a vast majority of names residing in either the healthcare or tech sectors.
He also pointed out that only 43 of 1,700 actively-managed funds have managed to outperform the Titans. If these 43 funds were compiled into a single equally-weighted portfolio, he pointed out it would have an 80% weighting in US equities, and almost a 50% allocation to technology stocks.
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“The overwhelming majority of those 43 funds that have outperformed have a growth, US, and technology bias. Yes, there has been the odd India and Japan fund that has managed to outrun the Titans, but realistically, there have been very few routes to outperformance – and this is backed up by the look through analysis.”
He added: “Putting it simply, to outperform the biggest stocks in the world, you haven’t really been able to own anything else.”
Active managers
Looking over the medium-to-long term, Paget said it is unknown whether these stocks are in a bubble or not.
“The point of this note isn’t to make some grand prediction. But, like us, many will see the domination of the Global Titans, and the impact that has had on active equity funds, as jarring.
“The fact that so few have been able to beat the 50 biggest stocks in the world, and that the overwhelming majority of those that have achieved this have done so by owning more of the titans than the global index suggests something odd is afoot.
“That’s not to say this trend won’t continue, though, and we have sympathy with the view that valuations for these companies are justified given the growth they are experiencing. If it does, it means the performance of our equity portfolio will look pedestrian.”
However, he added: “We have seen periods in the past where it seemed futile to invest in anything other than the world’s biggest companies, but this domination of mega caps has never continued indefinitely. When the market dynamics have shifted in the past, it has led to large falls in capital value.”
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