Looming Headache for Stock Pickers With Russell Indexes Rebalancing

This year’s annual rebalancing of the FTSE Russell’s stock indexes, when companies are added or kicked out of the equity gauges, will be a headache for active portfolio managers.

The reconstitution will increase the concentration of the top 10 largest companies in the large-cap Russell 1000 Index (ticker RIY) to a historical high of 29%, according to data from Wells Fargo & Co. That will effectively increase the relative tech underweight for most active managers, who are already struggling to keep pace with the mega-cap-driven gains in the broad equity benchmarks.

“This creates a bit more risks for active managers,” Chris Harvey, the firm’s head of equity strategy, said. “Another issue portfolio managers are confronting is diversification, especially on the large-cap growth side. When over 50% of a portfolio or a fund is in 10 names it complicates the diversification effort on multiple fronts.”

Approximately $12.1 trillion is currently benchmarked to FTSE Russell indexes, including the all-cap Russell 3000 and the small-cap Russell 2000. The rebalancing will throw more weight behind mega-cap names like Nvidia Corp. and Microsoft Corp. that have led markets higher this year, fueled by the artificial intelligence hype. As it stands, the Russell 1000’s biggest 10 names comprise nearly 28% of the index.

Weight of Top 10 Constituents

The problem is active managers typically run with a small-cap bias, according to Harvey. So the heavier the tech weightings are, the bigger of a “liability” they become.