Similar to what we observed in the United States, various cap-weighted top dog portfolios all underperform either a cap- or equal-weighted broad market index. As shown in Figure 6, if we invest $1 into each of these portfolios at the end of year 1981 and hold through year 2011, the equal-weighted top 2,000 global developed companies would yield the highest ending wealth—over $22 for each $1 invested, after 30 years—while the one-stock global top dog portfolio, the largest market-cap company in the whole developed-markets universe, would only leave us with a scant 55 cents of terminal wealth. This portfolio would have lost half of its wealth in 30 years, despite reinvesting all of the dividends. Net of inflation, this portfolio is down about 90 percent. And relative to the equal-weighted top 2,000, the global dog portfolio suffered an opportunity cost of 97.5 percent of its potential wealth.
These results clearly suggest that most top dogs have a very serious problem. They are usually priced to reflect a consensus view that they will remain on top, and will continue to grow handily, but they often don’t. They are usually high-multiple growth stocks and popular "safe havens." If they continue to grow, they can justify current values and can perform as well as their peers. If they attract unwelcome attention from regulators, or if their competitors gang up on them, they cannot maintain that perch indefinitely. Unfortunately, these underperforming top dogs are indeed big: They comprise a substantial share of the cap-weighted indexes. For this reason, these companies—and their propensity to disappoint—matter.
We document this top dog concentration in Figure 8. Consider the column for the United States. On average, the top dog in durables, energy and chemicals (over most of this span, these would be GM, Exxon Mobil and DuPont) has comprised over one-fourth of its sector, while the largest of the utilities and finance comprised just 6 percent of that heavily regulated sector. Across all sectors in the United States, the average concentration puts 17 percent of our cap-weighted dollars into the single largest-cap company.
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