Equities
The end of increasing index concentration
On March 21, 2025, a new era will dawn with the official end of an ever-increasing concentration in the Russell 1000® Growth Index (“Index”). Mega weights, defined as 4.5% or greater, had minimal representation in the Index until 2016 when these weights began a virtuous compounding cycle to represent 50.8% of the Index as of January 31, 2025. It is informative to note that the rise of the mega weights was not just driven by price appreciation, but also by FTSE Russell (“Russell”) reweighting the largest names higher during its annual Index reconstitution. Russell’s rigid rules-based methodology has reweighted the top six stocks higher by 6.5% over the last five years.
After consultation with market participants, Russell has decided to rebalance the Index quarterly to avoid breaching the 25/5/50 U.S. Regulated Investment Company (RIC) IRS capping thresholds. The IRS considers RICs as pass-through entities, thus taxes are not owed at the fund level. Instead, any capital gains or income is passed down to the end investor. The RIC must maintain a diversification test in order to avoid owing taxes at the fund level . Specifically, all companies that have a weight greater than 4.5% in aggregate can no longer sum to more than 45% of the Index. Further, individual companies are capped at 22.5% of the Index. Since the Index is currently in violation of this threshold, there will be a meaningful reweighting down of the largest six stocks. We believe this likely marks the bottom of an ever-declining name count in the Russell 1000® Growth Index as well (396 names as of 12/31/2024 vs. 682 as of 12/31/2014 and 869 in the Russell 1000® Value Index as of 12/31/2024).
This quarterly rebalance, starting March 21, 2025, will mark the official end of the increasing concentration in the Russell 1000® Growth Index that has served as a material headwind to active managers. Our own experience at Winslow Capital has shown a strong relative outperformance bias when the market was not experiencing increasing concentration. Conversely, it has been difficult to dramatically outperform during periods of increasing concentration.
One parting thought is that while the Russell 1000® Growth Index is the standard large cap growth benchmark, multiple sources have noted its shortcomings that led to the excessive concentration that is now being addressed. In that context, it may make sense to use the S&P 500® Index as a supplemental index when assessing large cap growth manager skill. Ten years ago, the S&P 500® Index was indeed a blend or core index but today we estimate 65% is large cap growth and only 35% large cap value. This makes sense as our economy has shifted toward asset-light growth companies and we believe over time, the S&P 500® will look more and more like a large cap growth index.
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ENDNOTES
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Winslow Capital Management, LLC claims compliance with the Global Investment Performance Standards (GIPS®) and has prepared and presented this report in compliance with the GIPS standards. Winslow Capital Management, LLC has been independently verified for the periods January 1, 1998 through December 31, 2023. A firm that claims compliance with the GIPS standards must establish policies and procedures for complying with all the applicable requirements of the GIPS standards. Verification provides assurance on whether the firm’s policies and procedures related to composite and pooled fund maintenance, as well as the calculation, presentation, and distribution of performance, have been designed in compliance with the GIPS standards and have been implemented on a firm-wide basis. The U.S. Large Cap Growth Composite has had a performance examination for the periods January 1, 1998 to December 31, 2023. The verification and performance examination reports are available upon request.
Winslow Capital Management, LLC (“Winslow Capital” or the “Firm”) is a registered investment adviser that specializes in growth investing through its various equity strategies. Winslow Capital is a subsidiary of Nuveen, LLC. The Firm provides investment advice to a wide range of clients including pension and profit sharing plans, investment companies, corporations, trusts, charitable organizations, commingled funds and bundled fee programs.
The U.S. Large Cap Growth Composite (“Composite”) includes all fully discretionary portfolios not subject to the diversification requirements under section 5(b)(1) of the Investment Company Act of 1940 (the “Diversification Rule”), invested primarily in U.S.-based large cap growth equity securities with a market cap generally above $4 billion, and according to a strategy that identifies stocks with above-average earnings growth, with additional consideration for valuation relative to the estimated earnings growth rate. Composite has no minimum portfolio size. Prior to June 30, 2014, the minimum account size was $5 million. Portfolios with significant client-imposed investment restrictions are not included. The Composite was created October 1, 1992. Inception date for the Composite is July 1, 1992. From July 1, 1992, to September 30, 1992, the Composite consisted of two representative taxable accounts, the only accounts managed for the complete quarter. Effective October 1, 2020, the U.S. Large Cap Growth Taxable Commingled Composite was merged into this Composite. Effective October 1, 2024, portfolios subject to the Diversification Rule were removed from this Composite. The benchmark is the Russell 1000® Growth Index (“Index”). Index returns include reinvestment of income but do not reflect taxes, transaction costs, advisory fees or other expenses that would reduce the performance of an actual account. A complete list of all the Firm’s composite and limited distribution pooled fund descriptions is available upon request.
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