The Rewards of Participating in Market Leaders

By: Tony Genua, Sam Mitter, Jonathan Lo* • September 13, 2017

“Do Stocks Outperform Treasury Bills?”

A recent academic paper published by Arizona State University was provocatively titled “Do Stocks Outperform Treasury Bills?” Of course they do, is this even a question? We would understand if everyone from a casual observer to an experienced investor looked at the question in the title with bewilderment – indeed, that equity markets deliver long-term returns above those provided by a low-risk investment such as a Treasury bill (T-bill), as a well-accepted fact in academic and industry literature.

However, this premise is based on broadly diversified stock market indices. In the academic study, the research showed “most individual common stocks provide holding period returns that fall short of those earned on one-month Treasury bills.”

How can this be? Much can be attributed to survivorship bias – throughout history, failed firms are commonplace. Indeed, the research shows that the single most frequent holding period return observed is a loss of 100%. If one included all of those failed companies, it turns out that only 42.6% of common stocks1 have a holding period return that exceeds the return of holding one-month Treasury Bills over the same horizon.

The flip side is that the research implies the overall positive return for broad portfolios of equities are therefore attributable to very few stocks – what we identify as the market leaders. Out of the 25,967 stocks to have appeared on the NYSE, Amex and NASDAQ exchanges from 1926 to 2016, the top 1,096 of them (or just over 4% of the total) account for 100% of the wealth creation, implying that the other 96% of stocks have collectively generated lifetime returns that match the one-month T-bill.

Taking this perspective a step further, the 90 top performing stocks – or about 1/3 of one percent of the total – accounted for over half the wealth creation and the top 30 performing stocks accounted for nearly one third (see Figure 1). To think that 30 out of nearly 26,000 stocks could have generated close to one third of the stock market’s wealth creation over a period of 90 years is astounding and speaks to the power of participating in market leadership.

Source: “Do Stocks Outperform Treasury Bills”, Hendrik Bessembinder, Arizona State University, August 2017


Market Leaders from this Cycle

The fact that a disproportionate amount of the historical total market return is attributable to very few stocks remains relevant in today’s market. To illustrate this, we examined the top contributors in the current bull market which began in March 2009 (Figure 2). We calculate the top 30 contributors in the S&P 500 accounted for 37% of the total equity market return during this bull market.

Source: Bloomberg, as of August 31, 2017


It is also important to note that the contribution depicted in the figures above are based on the weights of the S&P 500 constituents, which explains how Johnson & Johnson, which has a 270% return since the market bottom, can have a higher contributory effect than Amazon, up 1,521% over the same period, or why Nvidia Corp. (up 2,100% from the market bottom) does not show up on the top 30 contributors list. Figure 3 illustrates the S&P 500’s best performers since the market bottom.

Source: Bloomberg, as of August 31, 2017

In fact, in shorter time periods it is even more critical to participate in market leadership. In the years since the financial crisis, the top 10 stocks on any given calendar year have accounted for an average of 56% of the total market return. For years, where market returns have been sub-par (2011 and 2015, for example), the top 10 stocks accounted for more than 100% of the market’s returns, implying that not participating in them would have resulted in a loss. This year has been no different, with the top 10 stocks accounting for approximately 39% of the total market return.

Source: Bloomberg, as of August 31, 2017

The FANGs – Secular Winners

Since Jim Cramer initially came up with the acronym ‘FANG’ a few years ago as a buzzword in describing four of the most popular and best performing stocks (Facebook, Amazon, Netflix and Google), there has been a lot of investor attention on the FANG stocks. Some pundits have pointed to the outsized gains achieved as bubble-like conditions similar to the tech bubble of 2000.

The reality is that the recent rally in FANG stocks hasn’t been abnormal in a historical context. One perspective is to look at the historical weight of the 10 largest S&P 500 stocks (three of which are Facebook, Amazon and Google) – the combined weight of the 10 largest stocks is at 19% currently – below the long-term average and well below the peak of 27% seen during the tech bubble.

Source: Strategas Research, as of June 2017

In our view, stocks like Facebook, Amazon and Google which have “graduated” into the top 10 largest stocks are market leaders because they are secular winners, gaining share of wallet and outgrowing their competitors. We believe investors would be better served looking ahead at their future growth opportunities rather than back at the rally that has already occurred. If historical data is any indication, the greater risk is to not participate in market leaders.



The author of the aforementioned research article suggests that since the positive performance of the overall market is attributable to large returns generated by relatively few stocks, it is important to have portfolio diversification. In other words, poorly diversified portfolios tend to underperform because they omit the relatively few stocks that generate large positive returns. It is further noted that active portfolio strategies most often underperform their benchmarks because they are poorly diversified.

The author also states that “returns to active stock selection can be very large, if the investor is either fortunate or skilled enough to select stocks that go on to earn extreme positive returns”.

For more than three decades, Tony Genua has been dedicated to managing investment mandates with an objective of participating in market leaders with high conviction portfolios. This is the approach that he and his team continues to use within their mandates.


For more information, please speak with your AGF relationship manager.

* Jonathan Lo does not make investment recommendations.
1 Includes all common stocks listed on the NYSE, Amex, and NASDAQ exchanges from 1926 to 2016

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Published Date: September 13, 2017