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I Disagree

01-29-2025 · Insight

Quant chart: BATMMAAN vs DeepSeek – Effective N revisited

2024 proved to be another excellent year for most global equity investors, with all major stock indices performing well, while it was also another good year for quant investors. The MSCI World Index surged by 19% in USD, also driven by the ‘Magnificent Seven’, which rose by 67%, according to the Bloomberg Mag7 Index.

    Authors

  • Matthias Hanauer - Researcher

    Matthias Hanauer

    Researcher

  • Vera Roersma - Researcher

    Vera Roersma

    Researcher

However, in contrast to 2023, their returns varied significantly in 2024, ranging from 13% for Microsoft to 171% for NVIDIA. Furthermore, Broadcom, an artificial intelligence chip maker, joined the USD 1 trillion market cap club in December 2024, leading some market participants to call the term Magnificent Seven dead and coin the acronym BATMMAAN.1

The acronym BATMMAAN represents the eight largest stocks of the MSCI World Index as of December 2024, namely Broadcom, Apple, Tesla, Microsoft, Meta Platforms, Amazon.com, Alphabet, and Nvidia. While the MSCI World Index comprises 1,395 stocks, these eight stocks make up just over 25% of the total index.

This narrow market raises crucial questions about market diversification. One way to assess market concentration is through ‘effective N,’ a metric that compares the balance between portfolios with diverse weights versus those that are highly skewed. For instance, in a portfolio of 100 stocks with equal weights, the effective N would be 100. In contrast, if a single stock dominated 99.9% of a 100-stock portfolio, the effective N would be closer to 1.

Figure 1 | Markets get more and more concentrated

Figure 1 | Markets get more and more concentrated

Source: Robeco, Refinitiv. The figure shows the effective N (left axis) and the ratio of the effective N relative to the total number of constituents (right axis) for the MSCI World Index over time. Effective N is calculated as the inverse of the Herfindahl-Hirschman Index (HHI) for portfolio weights, where HHI is the sum of the squared stock weights.
The sample period is December 2000 to December 2024.

Figure 1 visualizes the effective N as well as the effective N relative to the number of all constituents for the MSCI World over time. For many years, the effective N hovered between 300 and 400, but since 2018 has steadily declined, falling below 100 for the first time at the end of December 2024. Consequently, the effective N is now less than 7% of the total number of index constituents, indicating a significant concentration.

This trend suggests that investing in value-weighted broad market indices such as the MSCI World Index may not offer the diversification one might assume based on the sheer number of constituents. Given that the dominant stocks are all US-based, tech-focused, and carry high valuations, they inherently share similar risks.

The plunge of US semiconductors such as NVIDIA and Broadcom on Monday, 29 January 2025, is a stark reminder of such concentration risks. The sell-off was triggered by the release of the latest version of DeepSeek, a ChatGPT alternative developed by a Chinese startup that seemingly achieves comparable performance at a fraction of the price and runs on less-advanced chips, raising questions about the US’s technological dominance.2

Recent research also indicates that smaller stocks outperform larger stocks after times of high market concentration.3 Therefore, investors may want to consider diversifying their investments by exploring opportunities in international markets, small-cap stocks, and active investment strategies that can deviate from capitalization weight.

Footnotes

1 Crowther, D., December 2024, “The Magnificent 7 is dead! Long live the BATMMAAN stocks”, Sherwood News.
2 Serafino P., and Hajric V., January 2025, “DeepSeek Is a Blow to the Case for Buying Big US Tech”, Bloomberg.
3 Emery, L., and Koëter, J., September 2024, “The Size Premium in a Granular Economy”, SSRN Working Paper No. 4597933.

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Important information
The Robeco Capital Growth Funds have not been registered under the United States Investment Company Act of 1940, as amended, nor or the United States Securities Act of 1933, as amended. None of the shares may be offered or sold, directly or indirectly in the United States or to any U.S. Person (within the meaning of Regulation S promulgated under the Securities Act of 1933, as amended (the “Securities Act”)). Furthermore, Robeco Institutional Asset Management B.V. (Robeco) does not provide investment advisory services, or hold itself out as providing investment advisory services, in the United States or to any U.S. Person (within the meaning of Regulation S promulgated under the Securities Act).
This website is intended for use only by non-U.S. Persons outside of the United States (within the meaning of Regulation S promulgated under the Securities Act who are professional investors, or professional fiduciaries representing such non-U.S. Person investors. By clicking “I Agree” on our website disclaimer and accessing the information on this website, including any subdomain thereof, you are certifying and agreeing to the following: (i) you have read, understood and agree to this disclaimer, (ii) you have informed yourself of any applicable legal restrictions and represent that by accessing the information contained on this website, you are not in violation of, and will not be causing Robeco or any of its affiliated entities or issuers to violate, any applicable laws and, as a result, you are legally authorized to access such information on behalf of yourself and any underlying investment advisory client, (iii) you understand and acknowledge that certain information presented herein relates to securities that have not been registered under the Securities Act, and may be offered or sold only outside the United States and only to, or for the account or benefit of, non-U.S. Persons (within the meaning of Regulation S under the Securities Act), (iv) you are, or are a discretionary investment adviser representing, a non-U.S. Person (within the meaning of Regulation S under the Securities Act) located outside of the United States and (v) you are, or are a discretionary investment adviser representing, a professional non-retail investor.


Access to this website has been limited so that it shall not constitute directed selling efforts (as defined in Regulation S under the Securities Act) in the United States and so that it shall not be deemed to constitute Robeco holding itself out generally to the public in the U.S. as an investment adviser. Nothing contained herein constitutes an offer to sell securities or solicitation of an offer to purchase any securities in any jurisdiction. We reserve the right to deny access to any visitor, including, but not limited to, those visitors with IP addresses residing in the United States. This website has been carefully prepared by Robeco. The information contained in this publication is based upon sources of information believed to be reliable. Robeco is not answerable for the accuracy or completeness of the facts, opinions, expectations and results referred to therein. Whilst every care has been taken in the preparation of this website, we do not accept any responsibility for damage of any kind resulting from incorrect or incomplete information. This website is subject to change without notice. The value of the investments may fluctuate. Past performance is no guarantee of future results. If the currency in which the past performance is displayed differs from the currency of the country in which you reside, then you should be aware that due to exchange rate fluctuations the performance shown may increase or decrease if converted into your local currency. For investment professional use only. Not for use by the general public.