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Concentration Impact on Style Indices

As the Big 5 Tech companies (FAAMG) have dominated many headlines we have discussed the rapid rise in concentration as well as how current concentration levels compare to that of the Tech Bubble along with some valuation analysis of the current top 5. We also want to mention how this recent surge in top five concentration has notable impacts on commonly-used style index construction methodologies.

Due to the increased reliance on passive allocations, investors should be aware of the significant distortions regarding style index diversification and skews in the classification assigned to individual stocks.

Morningstar Style Box Construction: Fact Sheet: The New Morningstar Style Box™ Methodology
“The dividing points between value, core and growth stocks vary to some degree over time, as the distribution of stock styles changes in the market. However, on average, each of the three stock styles accounts for approximately one-third of the total free float in a given size category”

Russell Style Index Construction: Russell U.S. Equity Indexes Construction and Methodology
“The market capitalization of the growth and value style indexes, as well as that of the defensive and
dynamic stability indexes, may not each equal 50% of their base index…However, asymmetry
in the capitalization distributions within the second and third quartiles results in a skewed distribution of Composite Value Score (CVS)”

From the literature above, there are notable differences in competing style classification conventions. Morningstar style boxes attempt to balance one-third of free float into each style category. Large growth currently has 38 constituents, vs. 78 stocks in large blend and 73 stocks in large value (according to iShares). Despite the increased “diversification” in large blend, AAPL currently has an allocation in excess of 17%! Each large cap style provided by Morningstar currently has allocations of roughly 40% in the top 10 holdings of each category.

Russell, on the other hand, allows for asymmetry in cap weightings between annual rebalancing, but the practical impacts are similarly noteworthy. At the end of 2014, the counts and market cap weights of value and growth classifications were symmetric. By June 2020 before the recent rebalance, the number of growth stocks had declined by nearly 30% yet the aggregate market cap of growth had still increased by more than 40%

Further dissecting Russell style classifications by separating stocks that fall in both value and growth categories, we can observe an even more dramatic shift. The market cap of stocks contained only in the growth category had more than doubled since the end of 2014 before the recent reconstitution despite the count falling from 294 to 230. More recently, the pure growth count has fallen dramatically further to 165 stocks!

Value and blend categories have similar market caps to 2014 levels prior to June’s rebalance , but the value count had risen to 456 from 315, while the blend category count had fallen from 435 to 293. Following the June reconstitution, the pure value category now contains 571 stocks! As investors bid up megacap growth stocks, many others have drifted into the value category as a result.

From a weighting perspective, despite having 523 holdings, Russell 1000 Growth currently allocates nearly 30% to its top 3 holdings and 44.7% to its top 9 holdings! Overall, the active share on the Russell 1000 Growth index against the S&P 500 is 41.9% (as of 7/14).


  • Applied Finance, a thought leader in valuation and portfolio construction, is a true “value” investment management company.  Unlike the majority of firms today that focus on low multiples to define “value”, we define value as identifying companies trading below their intrinsic value.  Our Valuation Driven™ approach forms the foundation of our investment decisions...more


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