Weighting scheme in focus: Mega Cap effect 2023 and impact on global stock markets

Weighting scheme in focus: Mega Cap effect 2023 and impact on global stock markets

According to a report from e-fundresearch.com, it appears that equal weighting will perform significantly worse in 2023 due to the mega cap effect. Despite this effect, value and low debt outperform the global stock market due to a favorable interest rate influence. Controlled factor strategies achieve similar information ratios in the long term, regardless of the portfolio weighting scheme.

By analyzing the facts, it can be seen that due to the mega cap effect in 2023, the market capitalization-weighted variant of equal weighting will outperform by around 3.8 percent. This shows a clear impact on the relative performance of the portfolios. Nevertheless, the favorable interest rate influence has a positive effect on stocks with low debt, which is also highly relevant to performance.

The total return-risk ratios since 2000 show that, regardless of the weighting scheme, there is a significantly positive premium in both cases. In the long term, equally weighted factor portfolios outperform their market capitalization-weighted counterparts by 0.3 percent p.a. a. However, equal weighting leads to more extreme manifestations in the frequency distribution, which increases the tracking error and the relative maximum price loss.

Overall, it can be said that the choice of weighting scheme has an impact on the distribution of returns. Equal weighting leads to more extreme expressions within the frequency distribution, and equally weighted factor portfolios show similar information ratios in the long term. This should be taken into account when making portfolio construction decisions.

As e-fundresearch.com reports, past performance results do not indicate the future performance of an investment fund or security. Investors should note that the value and return of an investment may rise or fall and that currency fluctuations may affect the investment.