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A Question of Weightings


The vast majority of equity market indices are capitalization weighted, meaning that companies with larger market values have a disproportionate impact on the performance of the index. S&P Dow Jones reports their widely used S&P 500 Index on both a capitalization-weighted and an equal-weighted (where each stock has the same weight) basis, and the longer term evidence suggests that the equally weighted index has a long-term performance ad­vantage vs. its cap-weighted version (see first chart below).

There has been a reversal of this long-term trend over the past several years, as the cap-weighted S&P 500 outperformed its equal-weighted version by 2.9% in 2017 and 3.3% in 2018. The strong performance of the FANG-type stocks (FANG refers to Facebook, Apple, Netflix and Google) accounted for much of the performance advantage during this time period due to their high weighting in the Index.

Growth of a Dollar

S&P 500 Equal Weighted vs. S&P 500 Cap Weighted1

Data from 12/31/89–3/31/19.
1Past performance is not indicative of future results. All returns are shown in U.S. dollars.
Sources: FactSet, Bloomberg, S&P Dow Jones.

Over the first quarter of this year, however, the longer-term trend has reappeared, as the equal-weighted S&P 500 gained 14.9% compared to 13.6% for the cap-weighted version. This trend may or may not continue over the course of this year, but the historical evidence suggests that over longer time horizons an equal-weighted strategy tends to outperform (see chart below).

PROBABILITY OF S&P 500 EQUAL WEIGHTED OUTPERFORMING CAP WEIGHTED1

Data from 12/31/89–3/31/19.
1Past performance is not indicative of future results.
Sources: FactSet, Bloomberg, S&P Dow Jones.

Investors with significant allocations to passive strategies (which are usually capitalization weighted) may have to reconsider how much the weighting decision can impact their long-term returns. We believe that active strategies, where portfolio weightings reflect perceived investment opportunity rather than company size, will make more sense for many investors.


DISCLOSURES
The opinions stated in this presentation are those of the authors as of the date listed on this presentation and are subject to change at any time due to changes in market or economic conditions.

PERFORMANCE
If Renaissance or benchmark performance is shown, it represents historically achieved results, and is no guarantee of future performance. All performance is shown in U.S. dollars unless otherwise stated. Future investments may be made under materially different economic conditions, in different securities and using different investment strategies and these differences may have a significant effect on the results portrayed. Each of these material market or economic conditions may or may not be repeated. Therefore, there may be sharp differences between the benchmark or Renaissance performance shown and the actual performance results achieved by any particular client. Benchmark results are shown for comparison purposes only. The benchmark presented represents unmanaged portfolios whose characteristics differ from the composite portfolios; however, they tend to represent the investment environment existing during the time periods shown. The benchmark cannot be invested in directly. The returns of the benchmark do not include any transaction costs, management fees or other costs. The holdings of the client portfolios in our composites may differ significantly from the securities that comprise the benchmark shown. The benchmark has been selected to represent what Renaissance believes is an appropriate benchmark with which to compare the composite performance.

The value of an investment may fall as well as rise. Please note that different types of investments involve varying degrees of risk and there can be no assurance that any specific investment will either be suitable or profitable for a client or prospective client’s investment portfolio. Investor principal is not guaranteed and investors may not receive the full amount of their investment at the time of sale if asset values have fallen. No assurance can be given that an investor will not lose invested capital. Consultants supplied with these performance results are advised to use this data in accordance with SEC guidelines. The actual performance achieved by a client portfolio may be affected by a variety of factors, including the initial balance of the account, the timing and amount of any additions to or withdrawals from the portfolio, changes made to the account to reflect the specific investment needs or preferences of the client, durations and timing of participation as a RIM client, and a client portfolio’s risk tolerance, investment objectives, and investment time horizon. All investments carry a certain degree of risk, including the loss of principal and are not guaranteed by the U.S. government.

S&P DATA
S&P Dow Jones is the source and owner of the trademarks, service marks and copyrights related to the S&P Indexes. S&P® is a trademark of S&P Dow Jones. This presentation may contain proprietary S&P data and unauthorized use; disclosure, copying, dissemination or redistribution is strictly prohibited. This is a presentation of Renaissance Investment Management. S&P Dow Jones is not responsible for the formatting or configuration of this material or for any inaccuracy in Renaissance’s presentation thereof. This data is to be used for the recipient’s internal use only.

REFERENCED INDICES
(Indices are unmanaged and are not available for direct investment.)

S&P 500 Index—The S&P 500 Stock Index Is a market capitalization weighted index and consists of 500 stocks chosen for market size, liquidity and industry group representation.

WRITTEN BY

PUBLISHED: April 10, 2019

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