二是科技股如七巨头波动大，即使长期持有收益颇丰，也需要承受长达近700天和超过50%的回撤，心理承受力不强的拿不住。
West Securities released a Research Report indicating that under the long bull market of USA Technology stocks, the difficulty for USA active Funds to outperform the market Index has actually increased. Over 70% of active Funds have a lower allocation ratio of Technology stocks compared to the S&P 500 ETF and do not beat the total return Index of the S&P 500.
Why have USA technology stocks been performing well for more than a decade, yet USA active funds have not concentrated in technology stocks, and most have underperformed the S&P 500 Large Cap?
On December 26, Western Securities released a Research Report pointing out that USA active equity funds have not clustered around technology stocks; even if they did, they wouldn't outperform the index, with only an extremely high allocation ratio of 1% funds beating the index.
Secondly, technology stocks, such as the seven giants, are highly volatile. Even though holding them long-term can yield substantial returns, it requires enduring nearly 700 days of pullbacks exceeding 50%, which those with weaker psychological endurance cannot withstand.
Thirdly, the Mag7 technology stocks frequently rotate; from 2010 to 2012, Apple significantly outperformed the market while NVIDIA underperformed, but from 2013 to 2016, it was NVIDIA that outperformed while Apple lagged. Investors find it difficult to seize the best timing for investment, making it not easy for concentrated technology stock holdings to beat the index.
Fourth, all holdings of USA public funds are publicly disclosed, making it easy for investors to know and find corresponding passive products. At the same time, the fund market has a wide variety of products, with low ETF fees that also provide capital gains tax benefits, so investors are unlikely to invest more in active funds. This makes funds reluctant to focus solely on technology stocks; they must follow the benchmark and diversify their investments, which has become a common practice in the industry.
Phenomenon 1: USA active funds frequently underperform the benchmark index.
Since 2010 (from January 2010 to October 2024), USA technology stocks have performed excellently, with the Mag7 achieving an annualized return of 32.7%, significantly outperforming the S&P 500 total return Index, with an annualized excess return of 17.5%.
In the context of a long-running bull market in Technology Stocks, it seems harder for USA active equity Funds to outperform the Index.
Research conducted by Western Securities from multiple dimensions found that in the past 10 years, only an average of less than 30% of active equity Funds were able to outperform the total return Index of the S&P 500.
Firstly, in the past 15 years, except for 2010 and 2022, the excess return of USA active equity Funds relative to the total return Index of the S&P 500 has been negative. Over the past 10 years, less than 30% of active equity Funds have been able to outperform the total return Index of the S&P 500.
Secondly, even extending the holding period, when calculating the cumulative return on a rolling 3-year and 5-year basis, it is still difficult to outperform the Index. In the past 10 years, the average monthly proportion of funds with positive 5-year rolling excess returns was only 17.2%, meaning that randomly buying any USA active equity Fund at any point in time, the investment returns after 3 or 5 years are likely to be worse than holding the S&P 500 ETF.
Thirdly, in comparison to their own performance benchmarks, both CAPM Alpha and FF5 Alpha have also performed poorly. In the past 10 years, more than half of the funds had negative CAPM Alpha each year. Even when extending the observation period, the 3-year rolling CAPM Alpha was below 0 for most of the time.
Phenomenon Two: The bull market in Technology Stocks has arrived, but funds are not 'gathering together' for warmth.
Although Technology Stocks have been the main focus for over a decade, the allocation ratio of USA active equity Funds in this area has not been significantly overweight.
Data from the past decade shows that active equity funds in the USA generally have a lower investment ratio in Technology Stocks compared to Vanguard S&P 500 ETF (VOO). After 2020, this gap has widened further, indicating that during the pandemic when technology stocks surged, active equity funds tended to reduce their holdings.
In the last ten years, only about 25% of active equity funds had a higher allocation of Technology Stocks than the S&P 500 ETF. If a technology sector allocation ratio greater than 40% is defined as significantly overweight, then the proportion of such active equity funds has remained below 10% in the long term.
According to the latest third-quarter report, only about one-third of active equity funds hold Mag7 positions, and within these funds, only 24.5% are overweight in Mag7. Among all active equity funds, those that are not underweight in Mag7 account for only 8.5%.
Why not overweight Technology Stocks.
Reason one: Even if overweighted, it is difficult to outperform the Index.As mentioned earlier, about 25% of active equity funds are overweight in the technology sector, but most did not outperform the S&P 500 Index. Only the top 1% of funds with the highest allocation to the technology sector outperformed the S&P 500 total return index.
The average allocation ratios of these funds in the technology sector and Mag7 are 81.3% and 30.5% respectively, exceeding the index's 32.34% and 29.51%. Most funds that are overweight in technology stocks but not excessively have failed to outperform the index, indicating that beating the index through an overweight in technology stocks is not easy.
Additionally, the high volatility of Technology Stocks leads to greater fluctuations and drawdowns for funds overweight in Technology Stocks than the Index, resulting in a significantly lower Sharpe ratio.
Reason 2: Mag7 has high income volatility.
As a leader in the Technology Industry, Mag7 exhibits significant high volatility. Although Mag7 has outperformed the S&P 500 total return Index over the last 15 years, it has also experienced substantial and prolonged drawdowns. Specifically, the maximum drawdown range for excess return net value was -73.2% to -34.7%, with an average drawdown of -53.7%. The longest drawdown duration lasted from 282 to 1,106 days, with an average drawdown duration of 692 days.
Therefore, the high returns of Mag7 come with significant risks that cannot be ignored. Poor timing of investments could lead to severe losses, even for long-term holders who have to endure drawdowns lasting nearly 700 days and exceeding 50%, which poses a substantial psychological challenge for investors.
Reason 3: There is rotation within Mag7.
Mag7 stocks not only have high volatility, but their trends are also not synchronized, showing clear rotation phenomena. For example, from 2010 to 2012, Google, Microsoft, and NVIDIA underperformed the S&P 500, while Apple outperformed the S&P 500 total return Index by over 15% each year. From 2013 to 2016, the situation reversed, with Google, Microsoft, and NVIDIA outperforming, while Apple performed weakly. Since 2022, only Apple, Meta, and NVIDIA have cumulative returns exceeding the S&P 500. In 2022, Mag7 as a whole underperformed the S&P 500, with Amazon, Meta, NVIDIA, and Tesla experiencing declines exceeding 50%.
This frequent rotation increases the difficulty of investing in Mag7 or Technology Stocks. Overall, both the performance of active equity funds in the USA and the analysis of Mag7 indicate that it is not easy to overweight Technology Stocks to outperform the Index.
Only through long-term, sustained, and significant overweighting of Technology Stocks or Mag7 can one relatively stably outperform the S&P 500 total return Index, but this brings new risks and issues.
Reason four: If long-term, sustained, and significant overweighting is preferred, why do investors not directly buy ETFs with much lower fees?
The USA fund market has a wide variety of products. In a structure dominated by Institutions, investors are mature, and public funds disclose all holdings quarterly. Therefore, if active equity funds significantly overweight Technology Stocks or Mag7 for a long time, it becomes easy for investors to be aware of this and find corresponding passive products.
The largest Industry ETFs in the USA market are all technology-themed, namely State Street's XLK (72.76 billion USD) and Vanguard's VGT (98.03 billion USD), with an overall fee rate of only 5 and 9 basis points. In the past two years, ETFs related to Mag7 have increased, such as the MAGS ETF established in 2023, which quickly scaled up to 1 billion USD in less than two years, with an overall fee rate of only 29 basis points.
These ETFs have better cumulative returns and risk-adjusted returns compared to the S&P 500 total return Index. For instance, XLK and VGT have annualized excess returns of 4.3% and 4.6% respectively since 2010, while MAGS has achieved an annualized excess return of up to 22.5% since its establishment. Meanwhile, the average fee rate for active open-ended funds in the USA is 0.87%, much higher than that of these ETFs.
Therefore, investors in the USA tend to choose low-cost, convenient ETFs to allocate to the Technology Sector or Mag7 while enjoying capital gains tax benefits. As a result, USA active equity funds lack the motivation for long-term, sustained, and significant overweighting of Technology Stocks or Mag7 because the market does not provide positive incentives for such behavior. Consequently, the industry naturally formed an ecosystem of benchmark adherence and diversification.
