Two of the biggest reversals of 2022 compared to 2021 were the outperformance of smaller caps and the outperformance of value compared to growth. Both of these factors helped drive the S&P 500^® Equal Weight Index’s recovery last year, as well as a decline in market concentration.

As sector and style exposures are not independent, another consequence of the turnaround in value’s performance and the demise of growth stocks was a seismic shift in the sector composition of our value and growth indices, resulting in record turnover for both the S&P 500 Growth and S&P 500 Value indices in their December reconstitution.

To understand better the interaction between the decline in market concentration and the shift in style index composition, we can examine concentration trends through a style lens using the Herfindahl-Hirschman Index (HHI), which reveals striking results. While S&P 500 Value’s concentration levels ticked up slightly, Exhibit 1 illustrates that after a dramatic rise since 2019, S&P 500 Growth concentration declined significantly, not seen since the burst of the tech bubble starting in 2000.

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The plummeting of Growth concentration was reflected in shifts in the factor composition of the index, the most prominent of which was a reduction of the strategy’s large-cap bias. In addition, Exhibit 2, which depicts S&P 500 Growth’s factor tilts relative to the S&P 500, shows its reduced exposure to the Momentum and High Beta factors.

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We can attempt to understand the implications of the increase in Growth’s small-cap exposure for active managers by analyzing the index’s distribution of returns. Exhibit 3 illustrates that in 2021, which was a stellar year for S&P 500 Growth, given the dominance of its mega caps, the distribution of the index’s stock returns was positively skewed, with the average return above that of the median, implying that only a minority of constituent stocks outperformed the index. In contrast, in 2022, S&P 500 Growth was the worst-performing factor index, and the distribution of stock returns became negatively skewed as a result of the relative outperformance of smaller caps, lowering the threshold for success.

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But despite this tailwind, the H1 2022 SPIVA results for growth managers were consistently discouraging across the cap spectrum, perhaps also indicating the potential inability of growth managers to tilt toward outperforming value stocks. While it remains to be seen whether managers were able to take advantage of the relatively more hospitable skewness environment during the latter part of last year, one thing is certain—the changing nature of our indices’ style, size and skewness characteristics.

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