I was reading a Morningstar article this morning that compiled the common elements in a number of well-managed successful US equity portfolios. The top holdings by weight, on the list are:

Microsoft

Nvidia

Amazon

Alphabet

Apple.

This isn’t exactly a surprise. The position of the top names in the S&P 500 and their weight as a percent of the total market cap of the index are as follows:

Apple 7.0%

Microsoft 6.7%

Nvidia 6.3%

Alphabet (A+C) 3.9%

Amazon 3.4%.

Together the five make up 27.3% of the index.

Because of this huge weighting, how you deal with these five names is probably going to be the most important decision you make as a PM. If not #1, it’s certainly in the top five.

Possibilities:

–one position would be to have more than the index weighting in each of the names. That’s probably the most aggressive stance.

–another would be to neutralize them in the portfolio, that is, to hold the market weighting in each name, with the idea that you don’t have a strong opinion on the merits and just don’t want to be hurt by having one or more at a non-index weight. Nevertheless, even though they won’t be a source of outperformance (the idea, after all is to ensure they won’t generate underperformance) you’ll own them.

–a third would be that you don’t think any of them will outperform. So you underweight each. You know that if you go to zero on each and are wrong, virtually nothing you can do elsewhere will make up for this mistake. So maybe you reduce each to 75% of the index weight and shift the 7% cash you’ve raised to, say, overweight the utility sector. The point here is that the names still show up in the portfolio holdings.

–a variation on the ideas above would be to have the total weighting of the five stocks at a specified level (the simplest would be at a total of 27.3%) but have the individual stock weightings different from the index level. One or two of the five might even be zero–implying the others would be overweights.

The general point, though, is that virtually every professional with the S&P 500 as a benchmark will own most or all of the top five. The crucial piece of evidence–missing from the article–is the overweight/underweight stance of the managers.