Bob Homan: Megacaps with mega fluctuations

Bob Homan: Megacaps with mega fluctuations

Bob Homan (Cor Salverius Fotografie) 980x600

By Bob Homan, Head of the ING Investment Office

First small caps, now large caps are also suddenly faced with large price fluctuations. That may seem positive, but it's bad news for returns.

The price movements of smaller shares, for example after a publication or announcement of figures, have always been somewhat larger. There is less trading in smaller shares and they are often not or hardly followed by analysts. Surprises are then lurking. However, it is striking that in recent years the price movements of shares with an extremely large market capitalization, the megacaps, are sometimes large and seem to be getting bigger and bigger, both up and down. This often concerns news or company figures that really matter, but which are not so surprising that analysts would not have taken them into account. What explains these large movements?

Active investors have something to prove

An important reason, I think, lies in the fact that more and more investments are made passively. The active investors who remain will have to prove their added value and experience great pressure to beat the benchmark every year. This means that they cannot afford to hold poorly performing stocks in their portfolio. They also cannot miss the real runners. In the event of news, action is taken quickly, at least faster than before, which strengthens the results.

The price movements are further amplified by algorithms that often trade along with the movement.

Additionally, an entire industry of casino investors has sprung up around the popular mega-cap stocks. You may also see advertisements from companies that offer to make you rich without obligation by trading in Amazon, Tesla or Nvidia shares.

Hyperactive investing does not lead to higher returns

Now, I have nothing against big price movements per se, but I also cannot imagine that they help the (hyper)active investor to achieve his coveted outperformance. The major price movements usually occur when the stock markets open, so it is not easy to be the first to respond to them.

What can investors do with this fact? First of all, it doesn't seem useful to me to participate in a price explosion or decline. First take a look and see whether fundamentally so much has really changed. Often the answer is 'no'.

Thematic funds take the pressure off

Active investors also find ways to be less guided by a benchmark. I am mainly thinking of all kinds of theme funds, where the theme in question has good chances of outperforming the overall market in the long term, but where the deviation in the short term can easily be negative. If the pressure of a benchmark is less great – often there is no suitable benchmark available at all – you have less need to participate in the issues of the day. Wonderful.