Interestingly, Investors in MSCI’s Value index should be aware of the risk by NOT owning growth stocks like FAANGs
Sparinvest hosted the annual Factor Seminar in Copenhagen. This year the main theme was 'Concentration Risk' where keynote speaker Nicolas Rabener, CAIA, managing director at FactorResearch and Sparinvest Chief Strategist David Bakkegaard Karsbøl gave valuable insights on the historical performance and concentration of ultra large caps and single stocks impact on equity factors and factor crowding. Sparinvest Portfolio Managers Per Kronborg Jensen and Lars Toft Jensen rounded up the seminar by walking us through how active Quant and Equity value investors work to mitigate those risks.
Key takeaways from the seminar
- Interestingly, expensive ultra large cap’s (e.g. FAANG’s) current cumulated index weight are not at historical highs when comparing to earlier top 5 stock concentrations
- Empirical evidence suggests that these stocks underperform the market and factor crowding increases risk of large drawdowns
- Investors in MSCI’s Value index should be aware of the risk by NOT owning expensive ultra large cap’s (e.g. FAANGs) as they contribute with nearly half of the relative risk in MSCI World Value vs. MSCI World
- As opposed to de-selection risk in the MSCI Value index, Sparinvest Global Value’s top 10 positions represent roughly 40% of the fund’s relative risk – notably as a result of actively selected exposure as opposed to risk from underweight in e.g. FAANGs