Financial Perspectives: Insights from Investment Professionals

CHATS: MAG7 vs. Active Management: Performance in Concentrated Markets

• CFA Society San Francisco / Stephen Biggs / Ben Inker • Season 5

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On this episode of "Financial Perspectives: Chats," Stephen Biggs, CFA, CAIA, CFP - Managing Director & Head of Alternative Investments for The Mather Group - sits down with Ben Inker - co-head of GMO's Asset Allocation Team - to dissect the realities of today's concentrated market. They delve into the intricacies of market concentration and investment strategies, offering a comprehensive analysis of today's market heavyweights, the "Magnificent Seven" (MAG7) stocks. 

Additionally, the episode touches on the broader implications, including potential regulatory and geopolitical challenges, for these tech giants and how these factors might shape their future performance. Inker sheds light on the enduring principles of value investing amidst a market dominated by mega-cap growth stocks, emphasizing that the fundamental principles of value investing remain robust and that there will come a time when active management will once again look attractive against a cap-weighted benchmark. 

Don't miss this engaging discussion that promises to enrich your understanding of market concentration and investment strategies.


If you'd like to learn more about the show, have a topic or speaker to suggest, or would like to leave us a comment, email podcast@cfa-sf.org.


This podcast is produced by CFA Society San Francisco, a not-for-profit professional association, providing professional learning and career resources to over 13,000 investment industry professionals worldwide. To learn more about CFA Society San Francisco, visit our website or connect with us on LinkedIn.

The information contained in this podcast does not constitute financial or investment advice. Please consult your own financial advisor for information concerning your specific situation.

Lindsey Helman:

Hello and welcome to this month's chat segment of the Financial Perspectives podcast. Our chats episodes feature dynamic conversations between industry experts from some of our recent and most popular webinar recordings. This month you'll hear from Ben Inker, co-head of GMO's Asset Allocation Team, and Stephen Biggs, managing Director and Head of Alternative Investments for the Mather Group, as they discuss market concentration and investment strategies through an analysis of MAG7 stocks.

Stephen Biggs:

Good afternoon everyone. Thank you for tuning in today. I'm Steve Biggs from CFA Society San Francisco. It's my pleasure to welcome you to our event today. Mag7 versus active management. We are joined by Ben Inker Today. Mr Inker is co-head of GMO's asset allocation team, and a, member of the board of directors, a partner of the firm. He joined GMO in 1992 following his bachelor's degree and has held several roles in research and analysis, portfolio management and CIO of the quantitative equities. Now I'd like to present Mr Inker and thank you for joining us today.

Ben Inker:

Sure Thanks for having me, steve.

Stephen Biggs:

Well, sure, sure Now. Ben, you've done a lot of work on stock market concentration and this came from a piece that you published recently on you know the bag seven and market concentration and how active managers work in this kind of environment. You know how does today's concentration differ or similar to prior periods? I mean, we certainly saw the tech bubble in the late 90s. That was in my career span and everyone wanted to compare that to the nifty-fifty. Fortunately that was before my time, but I'm sure you've looked into both.

Ben Inker:

Yeah, in terms of the sheer amount of concentration. So the size of the top seven or the top 10 names as a percent of the total S&P 500, we are a lot higher than we were in 2000. Actually looked pretty similar to what the world looked like in the nifty 50. But the thing about the nifty 50, right, you had this group of quality growth stocks that were in a bubble, but that actually wasn't the peak of concentration in the S&P 500. Now, most of this doesn't really matter because this all sort of predates the kind of the modern period of active management in the US, professional active management. But the market in the 50s and 60s was actually even more concentrated than it is now. The top 10 names were. You know, if the top 10 names right now are about 34% of the S&P, they peaked out at about 40% in the mid 60s.

Ben Inker:

Now those names were kind of different, right, the largest stock in the world then was AT&T, and AT&T was legitimately a gigantic company. It was kind of boring too. So it just wasn't that volatile. And if you looked at the very biggest companies, one of the things that makes today different is these very big companies are also quite idiosyncratically volatile. So from the standpoint of a stock investor who is concerned about tracking error. Right, it's a combination of the size and the volatility. Right now we've got more concentration in terms of pure size than we have seen in 50 years, and even relative to that world 50 years ago. It's probably. I don't have the data on hand to prove this, but I would be willing to bet the giant stocks today are more idiosyncratically volatile than they were back then.

Stephen Biggs:

Which could lead to more general market volatility and more volatility for funds that want to more closely align with the benchmark.

Ben Inker:

Yeah, I mean, it certainly is a challenge to take, you know. The obvious one today is NVIDIA. Nvidia is really big. It is not the largest name in the S&P yet, but it's a lot more volatile than Apple and Microsoft are. So for the vast majority of active managers in US large cap space, nvidia, whether they own it or not, is their largest single source of stock-specific risk.

Stephen Biggs:

So you, also mentioned that since 1957, nine out of the top 10 stocks underperformed the following year. This year, I mean, it seems in this mag seven or whatever. We have going back to 2020, other than the period of 22, where we had a sell off and a lot of these really contracted seems like this kind of momentum has continued for several years. What do you think is driving the outperformance relative to previous time periods?

Ben Inker:

You know it's a little bit tricky trying to pull that apart Kind of on a backward looking basis. It is almost always the case that the companies that are very large have outperformed historically, because that's kind of how you get to be very large and it's the forward looking returns that tend to be dicier. If we look over the long history, the biggest problem for these very large companies has been a combination of the fact they tend to be trading at a premium to the market and that should not be a surprise because we're defining that size on market capitalization, and valuation is a piece of market capitalization, right, it is your earnings, to oversimplify, times your PE. The higher your PE is, the bigger your market capitalization is. If we're looking at the very largest stocks, they are normally trading at a premium valuation.

Ben Inker:

The other piece that to date hasn't been true of this generation of giant companies, but was true of previous generations of giant companies, was they used to seem to have some trouble growing. Again, all of these companies, to oversimplify, had done a very good job of growing in the past. That is how they got to be giants. But once you are a giant, normally there are some diseconomies of scale. It is harder to run a gigantic company. There tend to be more costs involved. It can be harder to grow if you already dominate the businesses you are in and then you kind of have to continually enter new businesses and somehow win in there as well.

Ben Inker:

So, historically, these companies have tended to underperform because they've been expensive and they haven't grown. More recently, these guys, I mean the striking thing about them is they have grown. They have grown very nicely. Obviously NVIDIA the most extreme. In the last couple of years NVIDIA has grown in a way that no giant company has ever done before. But even kind of a slightly boring Microsoft or Alphabet has done a very good job of growing, given their giant size, I think that brings up a question on just valuations.

Stephen Biggs:

So we think about these having stretched valuations. I mean, maybe the market does as a whole, because if we're looking at relative valuations, maybe they're less elevated, with the S&P at 25 times approximately. But if we go out here on the NVIDIA and Microsoft, it's kind of roughly 35 times, which, given the growth rate. I don't know if NVIDIA can double revenue every year. That seems like the law of large numbers should kick in at some point. But still, even with a decelerating growth rate, it's pretty solid growth there. Thinking back to the tech bubble, see, not all of those top companies had huge multiples, but Microsoft was up there with about a 65 times multiple. Obviously there are a lot of lower quality names that were smaller stocks, but it does seem a little bit different. In that the, as you mentioned, they seem to seem to have the growth and maybe the I don't know if the premium relative to the rest of the market is as high as it was in at least 1999.

Ben Inker:

Yeah, it's definitely not as high as it was in 1999. But it's worth recognizing that, yes, microsoft was trading at 65 times earnings, but Coca-Cola was trading at 50. The whole damn market was trading at 35 times earnings. So it was a very expensive time and today, as you say, the overall market is expensive relative to history. So these guys aren't trading at an absolutely enormous premium to that. They are trading at a premium to it. If they continue to outgrow the market, they're probably worth that premium. If they don't, they're not.

Ben Inker:

And I think one of the things we are starting to see right, the Magnificent Seven as a name I don't think existed before last year. Maybe I'm wrong, but I think it was coined in 2023. And today you wouldn't call Tesla a member of the Magnificent Seven. They're no longer the one of the top seven names. I don't even think they're in the top 10 anymore. And so the kind of the fact that they were all growing so well, my guess is, if we look at five years from now, maybe a couple of them will have grown nicely over the next five years, but maybe a bunch of them will not have.

Stephen Biggs:

Well, it's interesting. So, as this applies to how this impacts active management, we say that markets are getting more efficient and you state that the concentration has been conflated with the markets becoming more efficient. I mean, it's to some extent, I guess, for several stocks maybe not Tesla, but Nvidia, you know. Despite the huge valuations, it seems to be correct. So what exactly are your thoughts around this?

Ben Inker:

Well. So I want to tear apart a couple of things. There is, to my mind, a conflation of the rise of the MAG-7 with market efficiency, because a thing that has occurred quite strikingly over the last 10 years is active managers have really gotten trounced by the index, and there is this assumption that, well, in an efficient market, active managers should not be able to outperform and therefore, if they have been underperforming, that must be a sign that the market has become efficient. And what we are trying to do is argue against that particular thing. And that's because when the market is getting more concentrated and by that we mean when the very largest stocks are outperforming, that is inherently a very bad situation for active managers. Active managers as a group are structurally substantially underweight, the very largest names. It is really hard for them not to be, and the way they were generally trained they don't have any none of the heuristics they have built around building portfolios would push them in any other way.

Ben Inker:

So they tend to be underweight, these very largest names when these very largest names are outperforming that bet has been hurting them. So we don't think that just because it's been a bad period for active managers necessarily means the market has become more efficient. With regard to, hey, the companies have done fundamentally really well. Doesn't that mean the market got it right? I mean, in a sense, the market got NVIDIA profoundly wrong. Right, I mean, if NVIDIA is up I don't know threefold, fourfold, however much it is up over the past 12 months, that is a profound sign that the market was wrong 12 months ago.

Ben Inker:

The market might be wrong today. It is unlikely to be wrong by so much that it was right a year ago. But if it was right a year ago, it's be wrong today. It is unlikely to be wrong by so much that it was right a year ago, but if it was right a year ago, it's profoundly wrong today. If it's right today, it was profoundly wrong a year ago. So you know, you might have this magical moment in time where these stocks are fairly priced, but their past performance means they haven't been continuously fairly priced.

Ben Inker:

It may have been a period where it was good to be a gigantic, in particular a gigantic tech company, and it is possible it will continue to be a wonderful period to be a gigantic tech company. I would say it's probably unlikely to be as wonderful to be a gigantic tech company. I would say it's probably unlikely to be as wonderful to be a gigantic tech company. If nothing else, the government is viewing you less favorably than it used to. In general, your customers are viewing you less favorably than they used to Regulatorily in the US and elsewhere. There are issues. There are some geopolitical issues that may well bite you as well.

Ben Inker:

So it's probably not going to be as smooth sailing for these companies over the next 10 years as it was over the last 10 years. That's not to say they're absolutely guaranteed to do badly.

Stephen Biggs:

So is it even possible for active managers to have that kind of concentration? I know, at least in mutual funds. Obviously not all assets are mutual fund assets, but there's restrictions on position sizes over 5%, so there's limits to what you can do. I mean, how would a manager with a positive view on some of these stocks actually express that? And then the opposite side of that, if all the concentrations in the top sectors, if you're negative on a smaller stock I think I looked the outside of the top 100, everything's less than a 20 basis point position on the S&P 500. If you don't like something, you don't own it. You're really not benefiting from that view because you're just not short that much. It's not that meaningful of a weight in the benchmark.

Ben Inker:

Yeah, that's exactly right. You know the active share concept, which is a perfectly reasonable way of looking at active managers. Basically, it says you own the market and then you own a long short portfolio on top of it. The thing about that long short portfolio you are owning on top of the market is you have very small positions in any company. That's a small percentage of the index and, as you point out, the vast majority of companies in the S&P 500 are a very small piece of the index and therefore, if you hate them, you still don't have much of a bet against them. And therefore, if you hate them, you still don't have much of a bet against them. And by default, your biggest bet against a company will not come from the stock you hate the most, but from the largest stock that you don't like enough to own a material amount of.

Ben Inker:

There are some regulatory issues around mutual funds. I don't think that requires you to be underweight the MAG7. The biggest issue there is, if you're going to own a market weight of the Magnificent 7, that automatically pulls down your active share. It reduces the amount of your portfolio that you can use to make bets against the market to try to outperform the market and that is annoying. It makes life more difficult. You know, once we get to the growth indices, then those mutual fund restrictions really do start to bite Right.

Ben Inker:

The Magnificent Seven are or the top seven names are more than half of the Russell 1000 growth or the S&P growth or any any of the growth indices you want to look at. And that's a problem given the mutual fund restrictions. But even where it isn't a regulatory problem, it does come up against the way active managers tend to think about their portfolios and how they want to own stocks in their portfolios that they like and how they want to think about their absolute risk versus their tracking. Error risk A lot, particularly on the fundamental side. If you're dealing with people who kind of pick stocks the old fashioned way they tend to think in terms of absolute risk. I only want to have so much of my portfolio in my favorite stock because I could be wrong. And for a lot of those managers the largest position they would have might let's say it's 5%. Well, if you've got a 5% position in Microsoft or NVIDIA or Apple, you're betting against it versus the benchmark.

Stephen Biggs:

That would be betting against it. I mean there's been. Versus 20 years ago, 30 years ago, there's a lot more focus on active share right. So even if you try to stay somewhat neutral, to the larger you like the names it makes it tough to, I guess, to provide that much active share or tracking error.

Ben Inker:

Yeah, I will say I do think the myth of active share has been a little bit overblown. Right when the original paper about active share came out, the authors noted that the very high active share managers had systematically outperformed, I think like 1980 to 2003, in which the equally weighted S&P had beaten the cap weighted S&P by about two points a year and these highly concentrated managers had beaten their benchmarks. It doesn't specify what their benchmarks are, but probably mostly where the S&P or something similar, by 1.1 points per year. One thing you can say about very high active share managers is they don't own very much that's in the benchmark and therefore are systemically underweight the very largest names. They have to be right If you've got 95 percent active share, you couldn't own more than five percent in the benchmark.

Ben Inker:

So I think part of the reason why people got so enamored of high active share managers was they're looking at this period of time in which it was really good to look different from the cap weighted benchmark. It was a really good idea to look much more like an equally weighted portfolio which you're going to as a very high active share portfolio. So I do think it's in order to be a good active manager. You don't have to have 90% active share, but life gets difficult if you are spending more of your portfolio just getting up to the benchmark in names either that you don't have a view on or you don't really like, but you don't want to have a giant bet against.

Stephen Biggs:

And you touched on it. Something we spoke up yesterday and a question came up on this from the audience is the difference between an equal weighted S&P index versus the cap weighted and difference in performance.

Ben Inker:

Yeah, so over the long run, we've got decent data on this, going back to 57. The top 10 stocks had underperformed the equally weighted S&P by about two and a half points a year since 1957. And since 2014 or so they have beaten the equally weighted S&P 500 by about five points a year. So for most of history you were better off in the equally weighted version of the S&P. That's not again. That's not shocking. We know that the big guys have tended to underperform. By being equally weighted, you do get something of a value bias to you, which for most of history has helped.

Ben Inker:

But, as we were saying yesterday, there is a difference between deciding whether you want to hire active managers and deciding whether you simply want to own the cap-weighted benchmark, you could say well, I don't really want to hire active managers because they're expensive and most of them underperform. But I think in a concentrated world the equally weighted version of the index has an advantage.

Stephen Biggs:

You can just buy that.

Ben Inker:

ETF cost a little bit more than the cap weighted ETF and it's got a little bit more trading to it, but it's not hard and it's probably not a bad idea.

Stephen Biggs:

Which kind of brings up. I mean so if you equal weight, you have you're more value biased and you're a smaller cap biased too. So smaller cap, you know considered factors. There's a number of factor-based ETFs these days. You know value, size, momentum, quality, dividends, cash flow, everything. What are your thoughts on that versus active management in a way to try and avoid some of the potential traps with a market cap weighted index that's going to have a big concentration in these large stocks?

Ben Inker:

Well, depending on how these portfolios are put together, they may have similar concentration. If you were going to buy a quality biased portfolio which was starting from the S&P 500 and then owning the top third of quality or something like that, you're going to have even more concentration at the top end Now you own high quality companies. You may say it's even more concentration at the top end, now you own high quality companies. You may say it's okay to be concentrated in high quality companies, but you've got a lot of concentration risk there. There are ways to build factor portfolios that are more biased towards equally weighted or indeed are equally weighted, but a lot of them. In a world where the mega caps are just a lot bigger than other companies, you still have a lot of that individual stock concentration. It's hard to get away from that until and unless you are willing to ignore those underlying market capitalization weights.

Stephen Biggs:

So we had another question come in on what would it take for active management to be able to generate returns that would bring people back to active management and I asked the question yesterday. You know is the point of active management to control the drawdown risk. So we know that potentially these large stocks that make up a large part of the index are highly volatile relative to previous periods.

Stephen Biggs:

So we would expect a major drawdown if we had something happen to tech, say a systemic problem like Taiwan, a massive drawdown. Is that what we're trying to do in active management? Are we really trying to outperform during strong periods or are we trying to kind of maintain during strong periods and protect some to the downside?

Ben Inker:

You know, I think active management as an activity comprises so many different ways of trying to pick stocks. I'm not sure there's a way to say, oh yes, all active managers are trying to give you better downside protection. That one can't possibly be true in the end. But even the various different ways active managers are putting together portfolios right, like if you talk to Kathy Wood, she would say wonderful things about the company she owns, but I don't think she would say and the great thing about our portfolios is they're going to have less downside risk.

Ben Inker:

You know, in terms of what would it take to get a move back to active management? Back to active management, some of this die has simply been cast right. Some of the move towards passive really occurred as defined benefit pension plans turned into defined contribution pension plans. Defined benefit pension plans, where the company was on the hook for the payments and was trying to minimize the cost of those payments to them. Hired a lot of active managers In defined contribution plans. They are never going back to active. The incentives are completely in the direction of passive, because the most important thing if you are a sponsor of a 401k plan is making damn sure you don't get sued and the one decision you can pretty much guarantee that you cannot get sued for is putting people in the lowest cost passive portfolio they can, you know. Otherwise, there will come a time again when active managers look pretty good against a cap weighted benchmark.

Ben Inker:

It will not mean that the active managers have gotten any smarter, and I'm not convinced that all of the money that has gone to passive will go back to active. I am convinced there will be a time in the foreseeable future where the people who have hired active managers will stop saying why on earth did I do that? That was so idiotic. I should have just bought the index and say, well, I'm kind of glad I did that. Back in 2005, active managers had trounced the S&P 500. And as an active manager at that time, man.

Ben Inker:

I thought we were pretty smart. I thought we had it all figured out. Now it turned out in 2005, the equally weighted S&P had beaten the cap weighted S&P by 10 points a year for five years and relatively few active managers had done any better than that. So mostly it was just you were comparing yourself against a really easy benchmark to beat. In the last 10 years you've been comparing yourself against an almost impossible benchmark to beat. I think that will change. But you know there's owning the market is a reasonably compelling investment idea.

Stephen Biggs:

Yeah, well, surely not everyone can be passive. It seems like there'd be structural issues, but we will see. I'm sure it'll shift back and forth.

Ben Inker:

Yeah, I mean, if we got to the point where it was overwhelmingly passive, then the cool thing is active managers as a group can outperform because their liquidity provision to the passive investors. One of the things about passive investors is they always have to pay for liquidity and the people who provide that liquidity get paid for it In round numbers. That's the active management community. The bad news for the active management community is they get that payment through trading and the thing about passive investors is they don't do much trading. So if the world was 95% passive, active managers would outperform, but if the world is 60% passive, it's a pretty small benefit, unfortunately. Maybe the alpha comes from trading.

Stephen Biggs:

We do have a number of questions that came in, so let's see. I'll try and get through some of them. One on the difference between the S&P 500 and EFI. Maybe international stocks have obviously lagged for the last 15 years or so. Would you favor tilting away from the US for this reason, or perhaps not tilt as much the way, given that most US stocks have P ratios more than non-US stocks? Just a question on the P, basically evaluation.

Ben Inker:

Yeah. So if you look in general, non-us stocks have lower P's than US stocks. That's kind of true across the board. There are some pockets where it isn't so. Sometimes when people do sector adjustments they say aha, the rest of the world isn't actually trading cheaper. It really depends on which direction you do things in.

Ben Inker:

So, for example, in Europe there are actually very few tech stocks. There just aren't that many. The ones that there are are actually pretty cool companies. So ASML trades at a pretty high earnings multiple because they're a monopolist. Nobody else can do what ASML can do, but they're a pretty small piece of the universe. If you scale them up to the 32% that tech is in the US, you make Europe a lot more expensive. 2% that tech is in the US, you make Europe a lot more expensive. But if you did the reverse, if you said, okay, let's look at the US, but with Europe's sector weightings, what you see is US banks traded a premium to European banks. Us autos traded a premium to European autos. Us healthcare companies generally traded a premium to European healthcare companies not Novo Nordisk, but fine and in general US companies are trading at a premium. I think that's probably a pretty good reason to over-own the rest of the world. I've been wrong on that for a while, so at best I've been really early.

Stephen Biggs:

Many of us are in the same boat, still waiting. A question on small caps and kind of the role I think private equity is playing versus, say, you know, the 90s. So you see the role of small caps playing the same role in a diversified portfolio. It's a smaller universe distorted by biotech. Companies are staying private longer. Im into the mid-cap universe is basically the advent of growth equity. And it came into play late 90s, early 2000s and there's part of that. So, that's the question, and kind of interesting to see.

Stephen Biggs:

I'd be kind of curious to get your thoughts on. We talked passive versus active on an S&P benchmark. Get your thoughts on. We talked passive versus active on an S&P benchmark. That's an interesting question on the small cap side, because you have very large ETFs that are buying an index. By definition, they're kind of pulling up the numbers on the small cap companies.

Ben Inker:

I would think, yeah, I mean there's so much going on with small caps, right? The rise of private equity, which has given companies another avenue than going public. The creation of Sarbanes-Oxley, which has really made it very difficult for small companies, or at least quite expensive for small companies, to be public. The rise of VC, which gives companies a way of raising capital at sizes that could never have been done historically on a private basis. And then you've got the rise of biotech, and biotech is the one group of companies that really does have to go public pretty early because the cost of bringing drugs or devices to market is really high.

Ben Inker:

So all of these have made small today different from what small used to be. Now there's another piece which is large today is also different from what large used to be, from what large used to be, and the most important piece of that, to my mind, is the increase in effective monopoly power within the large cap universe. That is particularly prevalent within the mega caps, all of the very largest names in the US, maybe kind of the weird exception of Berkshire Hathaway, because they're this very anachronistic conglomerate relative to everybody else is either an effective monopolist or oligopolist and has a lot of market power.

Ben Inker:

And so, among all of the other things that have changed, we have seen over the last 30 years, a sea change between the apparent return on capital for large cap companies, which is really dominated by the mega caps and everybody else the small cap companies and profits as a percentage of GDP in the US have really grown. You see that in a large cap space, in the small cap space, nothing has changed, and what that means is if that higher profitability means large caps are deserving of a higher valuation, well, the small caps aren't. So the discount they should trade at versus the large caps has grown. Now, what role do small caps have in your portfolio, man? I don't know. It really depends on what they were there to do. If they were there to outperform and they really had from the 70s until the early 90s well, I don't know why small should outperform.

Ben Inker:

There's no inherent reason why smallness should lead to outperformance. They are more domestic than international. Is that a good thing or a bad thing? I'm not sure. Uh, I mean, they have some different characteristics. Um, they the strongest reason I can think of to want to over own small relative to their weight in the general benchmarks is if you are hiring active managers. There still is pretty good evidence that within the small cap universe, active managers have an easier time outperforming. But that's I mean you can, in principle, exploit that without having to be overweight. The factor small cap and so much about small has changed and so much about small has changed. It is a research project for us to try to understand exactly which of the various things that have changed about small caps are the most important and what one should do about it.

Stephen Biggs:

Okay, maybe another webinar. We had a couple questions come in on the end of this, the end of the MAG-7, I guess. So it says once it has prior errors of concentration have ended badly, you don't seem to be concerned that concentration this time is elevated market risk correct. And then another person asked what? Triggered the valuation correction back in previous periods, 2000s to the 70s.

Ben Inker:

Yeah, you know, the funny thing is, I'm not even sure we know the answer in 2000, or in kind of the in the nifty 50. In 2000, it really does seem as if they kind of collapsed under the weight of unreasonable expectations for future growth, but there wasn't, like nobody rung a bell and nobody pointed. Here's why I sold this stock on this day. And with regard to the nifty 50, right there, the beginning of their fall coincided with the beginning of the very nasty 74-75 recession, and you could say maybe these are companies that were assumed that they were going to be immune from the business cycle and then they realized, oh no, that's not true the business cycle. And then they realized, oh no, that's not true. But man, even with the benefit of hindsight, it is hard to know exactly what caused the change, and so that makes it particularly difficult to guess what would cause the change this time.

Ben Inker:

What we have seen of the market, and particularly the market for growth-oriented companies in recent years, is the market is pretty unforgiving, if you disappoint. Now it's been a long time since NVIDIA disappointed anyone, and I don't know when they next will. But you know, tesla's fall from magnificence coincides with them switching from positive surprises to negative surprises, and my guess is that's what's going to do it Exactly. What causes them to start disappointing? I don't know.

Stephen Biggs:

Yeah, I was. So I co-managed the growth strategy through the tech bubble, focused on technology. So just to offer one thought there, it's just yeah. Expectations got too high and you had a huge buildup spend in IT infrastructure headed into the year 2000. If those of us around to remember, you know, all your computers were going to die like on January 1st 2000. So that was a massive spend and obviously those numbers got extrapolated into the future and we just never hit those there was a minor recession in 2000.

Stephen Biggs:

And that was a combination of just the equipment providers catching up and being a surplus instead of a backlog and numerous order cancellations and you know, eventually, eventually things, expectations get too high. So that's, that's my thought there.

Stephen Biggs:

We just have a couple of minutes left, not too many more questions. Someone mentioned that the more these, oh, here we go. So someone mentioned in conflict that more money going past the benefits of the index providers. I don't know if there's much you can do about that. Another one under performance of value versus growth continues has continued.

Ben Inker:

Should value investors keep the faith? Should they do anything different based on this recent experience? Yeah, so the recent performance of value looks very different on an equally weighted basis than a cap weighted basis, right, the reason why 2023 was such a disastrous year for value versus growth is because of the MAG-7. And outside of the MAG-7, value didn't do that badly, and outside of the MAG7, value didn't do that badly. So part of this is, if you believe that the mega cap stocks, who are, in general, all in the growth index, are going to continue to outperform, value is going to lose to that, the value factor, as we see it, is less about idiosyncratic names and more about the basic question of hey, what happens when you have stocks that are trading at a big discount to the overall market? And there we are seeing that the power of value is still going strong, and we see that very clearly on an equally weighted basis, because what we have seen is when growth stocks are trading at a big premium, which they are today, the problem for growth in that world is, if you are a growth stock that disappoints, it's really bad. Right, because not only do the forecast earnings come down that you were priced on, but the PE that people thought you were worth. You were trading at 40 times PE because people assumed you were going to grow. And now suddenly they say, oh well, maybe you aren't and that PE can fall in half.

Ben Inker:

And on the other side, if you are a value company, that people suddenly say, hey, maybe this isn't such a bad company, and you know it was trading at 10 times earnings. And they have an upward surprise and not only does that help but they say, ok, well, maybe you should trade more like the market and be at 20 times earnings instead of 10. That is still going on. So I don't think value is dead at all. We run a value long short which has been making really quite nice money because it's much more equal, weighted on the long and the short side, against that cap weighted benchmark. In a world where those mega caps are all on the growth side, if they all continue to win, value will definitionally lose. If they start performing in line with the market, value's got a chance. If they start to lose, value will look brilliant.

Stephen Biggs:

Great, I think we are at time. So with that, ben, thank you for joining us Very informative session today. Thank you to the audience and we hope to see you at a future event.

Ben Inker:

All right, thanks very much, steve.

Stephen Biggs:

Thanks, bye.

Lindsey Helman:

Thank you for listening to this month's chats segment on market concentrations and MAG7 stocks. Chats is a monthly segment featuring audio from our recently recorded webinars airing on the second Tuesday of the month. To view the video recording of this episode and discover additional Society webinars, visit the CFA Society San Francisco YouTube channel. Join us next month for our regularly scheduled Financial Perspectives podcast episode airing on the last Tuesday of the month, and make sure to send in a message to the show using the link at the top of each episode description or by mailing podcast@cfa-sf. org . We'd love to hear what you think of our new chat segment or any suggestions on future topics you'd like us to cover. Thank you for being a dedicated listener. This podcast is produced by CFA Society San Francisco, a not-for-profit professional association providing professional learning and career resources to over 13,000 investment industry professionals worldwide. To learn more about CFA Society San Francisco, visit cfa-sf. org or connect with us on LinkedIn.

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Tanya Suba-Tang

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Lindsey Helman

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