Beware the bite of the ‘top dogs’
The top ranking companies in every sector go on to suffer years of underperformance, a US expert claims
Winner’s curse: Apple shareholders suffered a torrid time shortly after the company smashed the market capitalisation record in August 2012, descending from a high of $705 (€520) per share to a low of $385 (€284) just seven months later. Photograph: David Paul Morris/Bloomberg
All over the world, the “top dogs” in stock sectors go on to suffer years of underperformance, according to prominent money manager Rob Arnott.
Just as Microsoft shares suffered years of underperformance after becoming the biggest US company in history in December 1999, Apple shareholders suffered a torrid time shortly after the company smashed the market capitalisation record in August 2012, descending from a high of $705 (€520) to a low of $385 (€284) just seven months later.
The winner’s curse, as it is known, is not a rare phenomenon – it can be seen in every sector in every developed market.
So says US fund manager Arnott, who argues investors need to be wary of the “top dogs”, irrespective of their sector or location. His statistics are eye-popping, and of relevance both to individual stock-pickers and to ordinary fund investors, the latter potentially suffering due to the heavy weight accorded to the top names in conventional indices.
Decade of damageIn a 2010 US-only study, Arnott found that, over the previous 59 years, the most valuable company in the various sectors typically underperformed the average stock by nearly 4 per cent over the next 12 months. Worse, “the damage doesn’t really slow down for at least a decade”, with the sector top dogs lagging their own sectors by 3.2 per cent annually over that time.
“Put another way, with compounding, the top stock in the 12 US market sectors declined 28 per cent in value in 10 years, relative to the average stock in its respective sector, over the past 59 years.”
The national top dog – today, that title still belongs to Apple – tends to do even worse, underperforming by an average of 5 per cent annually over the next decade.
The stats are not distorted by a handful of disasters; underperformance is the norm, with two-thirds lagging their sector over the following decade.
The Winner’s Curse: Too Big to Succeed?, Arnott’s follow-up paper in 2012, found the top dogs’ performance is “dismayingly unattractive” – even worse than in the US – in each of the major G8 markets (Australia, Canada, France, Germany, Italy, Japan, the UK and the US) and New Zealand.
On average, the top companies lag their sectors by an average of 4.3 per cent per year over the next decade. This lag was seen in all nine countries, ranging from more than 1 per cent per year in Germany to an “astonishing” 10 per cent in Canada.
Again, the results are even worse for the biggest company in each country, annual underperformance ranging from 7 to 10 per cent in Germany, Japan, Canada and New Zealand. The worst performance of all was seen in companies that managed to become the biggest in the developed world.