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Quant chart: BATMMAAN vs DeepSeek – Effective N revisited

29-01-2025 · 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

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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.

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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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In all cases where historical performance is presented, please note that past performance is not a reliable indicator of future results and should not be relied upon as the basis for making an investment decision. Investors may not get back the amount originally invested. Neither Robeco Institutional Asset Management B.V. nor any of its affiliates guarantees the performance or the future returns of any investments. 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. Robeco Institutional Asset Management B.V. (“Robeco”) expressly prohibits any redistribution of the Information without the prior written consent of Robeco. The Information is not intended for distribution to, or use by, any person or entity in any jurisdiction or country where such distribution or use is contrary to law, rule or regulation. Certain information contained in the Information includes calculations or figures that have been prepared internally and have not been audited or verified by a third party. Use of different methods for preparing, calculating or presenting information may lead to different results. Robeco Institutional Asset Management B.V. is authorised as a manager of UCITS and AIFs by the Netherlands Authority for the Financial Markets and subject to limited regulation in the UK by the Financial Conduct Authority. Details about the extent of our regulation by the Financial Conduct Authority are available from us on request.