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Tech weightings the key driver of factor performance in 2021

How just a few companies determined your success in 2021

The simplest trade may well have been the most profitable since the pandemic began. Backing big tech, the FANGs, or even the S&P500 in which they are more dominant than ever, has been a sure-fire way to deliver the strongest returns in decades to investors in balanced portfolios.

But just how important have they been, and how exposed are portfolios today?

It may come as a surprise to many, but even the return of the increasingly popular smart beta, or factor, investment approaches have been driven by allocations to big tech names.

  • In its regularly monthly update, Standard & Poor’s extensively analyses the key drivers of every part of global equity markets, with a particular focus on factors and attribution. The data gets down to such a granular level that most advisers could be excused for ignoring it all together. However, there are powerful insights and opportunities for those making investment decisions.

    According to S&P’s latest analysis, the effect of single stocks, but particularly the technology names and largest companies in the world including: Amazon, Apple, Alphabet, Microsoft and Meta Platforms (formerly known as Facebook), “played an important role in determining relative performance” in 2021. While there is no mention of records, the current concentration of the market in just five companies is the highest it has ever been.

    The analysis completed by S&P highlighted that “whilst most S&P500 constituents contributed positively,” just two stocks were responsible for 5 per cent of the index’s 27 per cent return. Those stocks were Apple and Microsoft, two multi-trillion-dollar leaders. If you were then to include Alphabet, the contribution moves to 7 per cent, according to S&P. 

    Interestingly, it wasn’t all good news, with both Amazon and Facebook unable to keep up with their fellow giants, underperforming in 2021 after strong results in 2020. The story was the opposite for Tesla and NVIDIA, albeit not to the same level of Apple. So why does this matter?

    The sheer scale of the out- and under-performance of just these six months was ultimately the most important determinant of the comparative performance of each ‘factor’ strategy in 2021. With many technology companies held across multiple factor categories, ranging from quality, to momentum and low volatility, getting the allocation wrong can be a major detractor on returns.

    This also highlights the challenge facing active managers in 2021, with the headlines about underperformance set to dominate the financial press in the months to come. Most active fund managers simply haven’t been rewarded for straying too much from the index in what has been near-perfect conditions for the world’s largest companies, and ultimately their operational ability to navigate the pandemic.

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