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March 2022 Returns and Asset Performance Saffron Capital
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Published by Brad Horn on April 19, 2022
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Tags
  • equities
  • investment planning
Equity Returns as a Function of Size | Saffron Capital

Think 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%.
Equity Returns as a Function of Size | Saffron Capital
Average annualized outperforamnce of companies before and after the first year they become one of the 10 largest in the U.S. Based on the Fama/French Total US Market Research Index.

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.

Have questions or concerns regarding the performance of your portfolio?  Schedule time with us here.  Whatever is motivating you to reach out, we’re here to listen and help.

Past performance is no guarantee of future returns.

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Brad Horn
Brad Horn

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