Morningstar - Q3 2021 - 13

EXHIBIT 2
conclusion. To be sure, evaluating only the truly
huge companies boosts the result against
bonds, as 76% of January 2011's 50 largest stocks
subsequently outgained the bond index, as
opposed to the biggest 1,000's score of 47%. But
the outcome against the stock index remained
steady. With the Nifty Fifty, as with the
broader group, four out of five firms trailed the
stock market benchmark.
Top Contributors
Bessembinder's boldest claim was that 4%
of the U.S. stock market's companies
accounted for its entire gains. Such math does
not hold during bull markets. (If an index
appreciated by 1% for the year, a single stock
could well be said to have accounted for
all its gains. If the index appreciated by 30%,
then many, many stocks will be required
for the task.) However, as shown in the table
below, which measures the performance
contributions of the highest-performing stocks,
the principle remains intact:
Performance Contribution From
Highest-Returning Stocks, January 2011
to December 2020 (%)
Biggest 1,000 U.S. Stocks
Next 4,000 U.S. Stocks
Top 1%
2.8
3.8
Source: Morningstar Direct. Data as of 12/31/2020.
To clarify what the numbers signify: The
calculations assume an equal-weighted portfolio,
then compute the total return generated
by the given percentage of highest-performing
stocks. Thus, had one formed an equalweighted
portfolio of the biggest 1,000 stocks
in January 2011 and held those securities
without rebalancing, the 10 best stocks (the
column labeled " Top 1% " ) would have delivered
2.8% of total return.
If the remaining 990 stocks did absolutely
nothing-metaphorically stored under
the mattress-the index would have gained
2.8% per year over the decade. Similarly,
the biggest 1,000 stock portfolio would have
realized an annualized gain of 7.5% from
its 100 best stocks ( " Top 10% " ).
Top 10%
7.5
7.4
Clearly, Bessembinder's research remains
valid. His conclusion that most stocks disappoint
cannot be disputed.
The Debate
Bessembinder's research was at the center of
a recent public squabble between British
investment managers.
Lawrence Burns, from the firm Baillie Gifford,
cited Bessembinder's research showing
that " a small number of superstar companies "
accounted for the stock market's gains.
Stated Burns, " The other 99% of companies
were a distraction to the task of making
money. " For Burns, the results implied an obvious
investment strategy: Hold the portfolio's
winners. Profit-taking can be " the worst
possible mistake. "
Andrew Dickson, founder of Albert Bridge
Capital, strongly disagreed. Three days later, he
responded: " Baillie Gifford's never-sell mantra
is a song for fools. " Dickson sharply criticized
both Bessembinder's paper, which had
been presented " in a sensational way, " and Burns'
" after-the-fact diagnosis. " For those who
lacked a time machine that would permit them
to identify the stock market's future
stars, claimed Dickson, Burns' advice was
" the worst possible. "
Up
77
Down Gone
80%
41
33
26
16
20
40
60
Cats and dogs, Madrid and Barcelona,
growth and value investors. The language of
the Burns-Dickson dispute was new,
but not the rivalry. Baillie Gifford buys growth
stocks-in recent years scoring big with
its Tesla TSLA position-while Albert
Bridge prefers value stocks. Consequently, Baillie
Gifford resists selling equities because
they have become costly, while Albert Bridge
suggests doing so.
7
Biggest 1,000
Next 4,000
Biggest 1,000
Source: Morningstar Direct. Data as of 12/31/2020.
I agree with Baillie Gifford and growth investors
on the facts. It cannot be denied that,
over time, most equities stink. But that information
alone does not support the policy of retaining
the portfolio's winners. An additional question
must be asked and answered. And when
it is, the interpretation favors Albert Bridge/
value buyers.
Large Stocks Versus Small Stocks The
bigger names had more success than
their smaller rivals.
Percentage of Stocks Divided by Size, January
2011 to December 2020.
Up
77
Down Gone
80%
41
33
26
16
7
Biggest 1,000
Next 4,000
Source: Morningstar Direct. Data as of 12/31/2020.
20
40
60
M
C
M
EXHIBIT 3
Stocks Versus Two Indexes Most
stocks couldn't even outperform a
corporate bond index, but large stocks
did better than small stocks.
Percentage of U.S. Stocks Beating the Indexes,
January 2011 to December 2020.
Morningstar US Government and
Corporate Bond Index
Morningstar US Market Index
60%
47
20
22
11
Next 4,000
20
40
Two Market Regimes
Consider two hypothetical stock markets: Growth
Dream and Value Dream. In Growth Dream,
each stock repeats the previous year's order. The
top performer once again leads the way,
the salutatorian places second, and so forth.
This conduct maximizes the compounding effect
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13
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2900447 https://www.ft.com/content/f8f8b067-e663-4afe-90dd-6a243929af86 https://www.ft.com/content/29e1dae4-20c6-4988-abca-c5faf21b61c3 https://www.ft.com/content/29e1dae4-20c6-4988-abca-c5faf21b61c3 https://www.morningstar.com/stocks/xnas/tsla/quote http://www.morningstar.com/lp/magazine
Morningstar - Q3 2021

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