The Magnificent Seven

Those of a certain vintage may well remember the classic 1960 film The Magnificent Seven, which is lauded as possibly the greatest of all of the Western film genre. The all-star cast includes acting legends Yul Brynner, Steve McQueen, Charles Bronson and James Coburn among many others and sees them come to the rescue of a beleaguered village under attack from bandits (I’ll gloss over the 2016 remake with Denzel Washington!).

Today, all the talk is about a new magnificent seven, but instead of rescuing a village, this time it’s seven companies rescuing a stock market! Replacing Brunner, McQueen, Bronson et all, we have Apple, Microsoft, Alphabet, Amazon, Nvidia, Tesla and Meta, and their performance so far this year has been just as good as their acting forerunners. In the first half of 2023, the S&P 500 Index was up 10.3% in GBP terms but what is remarkable is that the performance of these seven companies accounted for 73% of the return. Even the worst of these stocks was up 36% in the first half of the year while Nvidia was up a staggering 190%. No wonder they’ve been termed the ‘Magnificent Seven’! The poor, remaining 493 stocks in the index, have contributed a paltry 27% of the market return so far this year.

Taking a look at the S&P 500 Index today, these seven stocks are the following weights:

*Correct as at 24 July 2023, rounded to 1dp

Apple now represents the largest weight of a single stock in the entire history of the S&P 500 Index and is bigger than the entire consumer staples sector! Looking at the MSCI AC World Index, Apple represents 4.7% of the global benchmark and is now bigger than the entire allocation to the UK market.

Some may say this is entirely justified given its performance and indeed the performance of the UK economy in recent years, but it does have consequences, both for passive and active investors.

The increasing concentration of these large stocks is a reminder that even for passive investors, the shape of their underlying portfolio will change over time, with a portfolio today looking quite different under the bonnet to one bought five years ago even if no changes in holdings have been made. The increasing exposure to these technology stocks shifts the biases in not just the S&P 500 Index, but also global indices and style-based indices too. The recent update to the Russell 1000 Growth Index (a US index exposed to the 1000 largest companies with specific growth characteristics), has seen exposure to the technology sector now hit 50%, up from 46.3% in its last rebalance.

The size of both Apple and Microsoft presents a challenge for active managers too, with both stocks reaching levels in the benchmark that will make actively managed funds seriously consider whether it is prudent to be overweight. According to data from Morningstar, only six actively managed funds out of 249 in the IA North America sector currently have an overweight position to Apple. That is a remarkably low number given just how successful the stock has been over the last 15 years, but fund managers will be keen not to run such high levels of stock-specific risk. It also goes some way to explaining the strong headwinds that active managers have faced, particularly in the US market, where overweighting the magnificent seven would be a highly adventurous move given their sector concentration, even if it was the right thing to do.

The UCITS rules also impose a hard limit of 10% on a single stock position in a fund and while that means there is some headroom for managers to overweight Apple, putting almost a tenth of a portfolio in one stock is more than most can bear. We’ve been here before in the UK with both Vodafone and Shell historically breaking through a 10% weight in the FTSE 100 Index meaning that every actively managed fund had to take an underweight position no matter how much they liked the companies.

I’m no single stock analyst and can say with certainty that I have no idea whether Apple and its other six gunslingers will continue their exceptional performance. What I can say is that there are signs that investors are shifting flows to other methodologies when making an index. Interest in equally weighted indices is increasing, particularly in the US where neutralising the allocations to the seven is gaining some attention. This will be music to the ears of all those active managers who have been running underweight positions to the seven who will be hoping that the stocks run out of steam sooner rather than later to help their relative performance.

Whatever your view is, the AJ Bell range can provide an answer. If you have confidence that market cap weighted indices will continue to rule the roost, our Passive MPS and Funds ensure that you have a full allocation to these stocks. However, if you feel they may falter, then the Active MPS is underweight these stocks which should help absolute and relative performance. Of course, the Pactive MPS sits between the two.

Find out more about our MPS range