March Returns and Asset Performance
April 2, 2022
April Returns and Asset Performance
May 2, 2022Think Twice Before Chasing the Biggest Large Cap Stocks
The return profiles of companies change as they grow to become large cap stocks. This is especially true of the ten largest companies trading on the US stock market. Initially, the returns that pushed them into leadership positions were impressive. But not long after joining the Top 10 largest by market cap, these stocks, on average, had returns that lagged the market. Fore example:
- From 1927 to 2021, the average annualized return of the 10 largest stocks over the ten years prior to joining the Top 10 was 11.3% higher than the market.
- In the 5 five years prior to joining the top 10 list, the stocks outperformed the market by 20% on average
- In the 3 years prior to joining the top 10 list, return over-performance versus index exceeded 25%.
Meanwhile, once a company has ascended to the top 10 list, performance versus market, on average, begins to degrade. For example:
- Five years after joining the Top 10, the biggest large cap stocks were, on average, under-performing the market—a stark turnaround from their earlier advantage. The gap was even wider 10 years out.
- Intel is an illustrative example. The technology giant posted average annualized excess returns of 29% in the 10 years before the year it joined the Top 10. However, in the next decade, Intel under-performed the broad market by nearly 6% per year.
- Similarly, the annualized excess return of Google in the five years after it joined the list dropped to half the rate of returns observed 5 years before the joining the top 10.
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Past performance is no guarantee of future returns.
