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Is an Equal-Weighted Index a Safer Bet Than Cap-Weighted?

Nope. Same-sizing the portfolio members means steeper drops and less robust outperformances, says Sam Stovall.

By Larry Light

The cap-weighted S&P 500, dominated by fast-growing tech megaliths, has many wondering if its unbalanced nature will tip over. Can chipmaker Nvidia, up 79% this year and 0.5% on Friday, with a towering 75 price/earnings ratio, continue its upward march?

Examples like that are why the equal-weighted S&P 500 index is getting a lot of attention these days. Here, top-weighted Microsoft, with its 7.4% share (Nvidia, the fastest grower, is No. 3) is counted as the same as the smallest stocks in the index, like No. 500, Bio-Rad Laboratories, at 0.01%. No surprise, the equal-weighted index is up just 3.7% this year, versus the traditional cap-weighted alternative, at 16.6%.

The trouble with pivoting to the equal-weighted index, as a way to hedge tech slowdowns, is that it may not be any safer than the cap-weighted index. In fact, evidence exists that equal-weighting delivers subpar returns over time.

A study by Sam Stovall, chief investment strategist at CFRA Research, showed that equal-weighted indexes typically endured deeper selloffs and reduced frequencies of outperformance than their cap-weighted cousins during market declines of 10% or more for the S&P 500 (since 1990), Nasdaq-100 (2007), Russell 2000 (2000) and S&P SmallCap 600 (2011).

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History shows “that the collective approach to investing has frequently not lessened the magnitude of the eventual decline,” Stovall wrote. “Prudence is not synonymous with protection. Concentration has been a major concern of this market’s outsized advance.”

As Stovall pointed out, the overweening influence of Big Tech has distorted market returns: “Now that the S&P 500’s year-to-date climb has been driven almost exclusively by a handful of tech-oriented stocks, investors have begun to quote Winston Churchill by saying, ‘Never was so much owed by so many to so few.’”

Indeed, on June 24, the market should have had a good day: 70% of the S&P 500’s stocks were positive. Unfortunately, Nvidia had an uncharacteristic bad day, slipping 6.7% and dragging down everything. The index closed 0.36% in the red.

More days like that may impel giving equal-weighting a closer look. Either way,  index funds have long been important to asset allocators, based on the proposition that beating the market is very difficult. That sentiment may be changing with the advent of private assets in institutional portfolios. While there are no figures on the extent of allocator passive investing, it is notable that private investments such as real estate are actively managed, per a study by the Center for Retirement Research at Boston College.

Could such actively managed private investments become an even more popular way to hedge public markets dominated—for better or worse—by a select few? The use of indexes of all kinds may change depending on the result.

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CII Opposes Admitting Dual-Class Stock to S&P Indexes

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Home > News > Pensions > Norway’s NBIM Takes Top Spot as World’s Largest Asset Owner
Pensions

Norway’s NBIM Takes Top Spot as World’s Largest Asset Owner

Japan's GPIF was dethroned due to a weak yen, despite strong fiscal returns in 2023.
By Matt Toledo



Norway’s government pension fund has dethroned Japan’s as the biggest asset owner in the world. 

On Friday, Japan’s Government Pension Investment Fund, which had been the world’s largest pension fund since 2002, announced Friday that it achieved a 22.67% return in the 2023 fiscal year. The fund’s assets grew to 245,982 trillion yen ($1.53 trillion) at the end of March, primarily boosted by foreign and domestic equities, which returned 40.06% and 41.41%, respectively. 

Despite the fund’s strong returns, the GPIF was dethroned as the largest asset owner in the world: Norway’s Government Pension Fund Global, managed by Norges Bank Investment Management, took the top spot with roughly $1.68 trillion in assets.  

A weak yen, currently hovering near 38-year lows, is partially to blame for the decline of the value of the GPIF’s assets when measured in dollars.  

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The GPIF’s foreign bonds returned 15.83% in the fiscal year, while domestic bonds returned negative 2%. The fund allocates a roughly 25% split to foreign and domestic stocks and bonds. The fund’s allocations to other asset classes are marginal, although the fund is exploring investing in new asset classes.  

In March, the GPIF issued a request for information on asset classes such as gold, cryptocurrency and timber. In April, the GPIF announced an infrastructure investing partnership with Dutch pension fund APG. 

NBIM reported a 6.3% return in the year’s first quarter, with its assets growing to 17.719 trillion kroner at the end of March ($1.68 trillion). 

“Our equity investments had a very strong return in the first quarter, particularly driven by the tech sector,” said Trond Grande, deputy CEO of NBIM, in an April statement.  

According to WTW’s Thinking Ahead Institute, the top 3 largest asset owners at the end of 2022 were GPIF, NBIM and China Investment Corporation, according to the firms Asset Owner 100 index. 

Related Stories: 

GPIF, APG Launch Infrastructure Joint Investment Partnership 

Japan’s GPIF Explores Incorporating Cryptocurrency Into Its Portfolio 

Japan’s GPIF Seeks to Boost Excess Returns by Resuming Foreign Stock Lending 

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