“While concentrated stock positions can create substantial wealth, there is also a high probability of dramatic losses that have the potential to derail the financial future you had envisioned for you and your family.”
Weiheng Chen, Global Market Strategist, J.P. Morgan Private Bank
Alex Wolf, Head of Investment Strategy, Asia, J.P. Morgan Private Bank
Yuxuan Tang, Global Market Strategist, J.P. Morgan Private Bank
Kendrick Cheung, Equity Strategist, J.P. Morgan Private Bank
Inspired by Michael Cembalest’s The Agony & the Ecstasy 1 , the definitive study of the risks and rewards of concentrated stock positions, we have applied a similar analysis on major equity markets in Asia to broaden the scope of the research and test the hypotheses in an alternate geographical and economic context. Broadly, our findings corroborate the conclusions from the original study, and we believe the key takeaway for investors still hold true – “While concentrated stock positions can create substantial wealth, there is also a high probability of dramatic losses that have the potential to derail the financial future you had envisioned for you and your family.”
The story of concentrated wealth is particularly relevant in Asia. This region has more billionaires than any other part of the world 2 , and has continued to produce them at an astonishing pace over the past decade and even throughout the pandemic. Pioneering innovation in various sectors coupled with Asia’s vibrant economic fundamentals and capital markets have continued to sow opportunities for entrepreneurs and investors in the region. However, core to this story of competition and success is “creative destruction”, where new and innovative businesses disrupt or displace incumbents who once led their respective fields, creating both winners and losers. Both the positive and negative experiences of investors in those markets would be magnified by the level of concentration they have in specific companies or sectors. Furthermore, sector-level and broader macro risks are ever-present in this region – China’s recent regulatory push against technology companies and the myriad of macro risks inherent to emerging markets come to mind – adding more layers of complexity to managing concentration risk.
Today, investors are grappling with heightened market volatility amidst global concerns over persistent inflation, faltering growth and rapidly tightening monetary conditions – a stark departure from past years of stable macro conditions and easy money. 2022 has been one of the worst years for both equities and fixed income in decades, and the average stock in some U.S. indices is down 40-50% from peak levels, far worse than the index’s performance. 3 This experience is a stark reminder of the risks of concentration and the benefits of diversification.
Against this backdrop, we attempt to quantify the risks of concentrated stock positions, highlight several sector case studies, and summarize some of the broader macro risks which characterize the markets in the Asia region. When markets eventually recover from this episode, investors would do well to recall this experience and implement practical strategies to manage concentration risks, diversify sources of return and take steps towards achieving their goals.
Measuring Concentration Risks
Asia has a diverse set of economies and markets, each with unique nuances and histories. As an introduction, we focus on two of the leading exchanges in the Asia ex-Japan region, Hong Kong and Singapore. Borrowing the definition used in Agony, we see that a significant number of companies that were ever listed on those exchanges from 1992 to 2022 experienced “catastrophic loss” where the stock declined 70% or more from peak levels which is not recovered.
A SIGNIFICANT NUMBER OF COMPANIES EXPERIENCED LOSSES OR UNDERPERFORMED THE INDEX
% of companies listed from 1992-2022
This table shows an analysis of the companies on the Hong Kong and Singapore Exchanges which experienced losses or underperformed the index
• Looking at Hong Kong, 66% experienced catastrophic loss, 73% had negative absolute returns, 76% had negative excess returns vs the index and 4% were “mega winners”
• Looking at Singapore, 85% experienced catastrophic loss, 65% had negative absolute returns, 72% had negative excess returns vs the index and 3% were “mega winners”
Further borrowing from the approach used in Agony, we also consider another way to think about the risks of concentrated stock positions: “How often would a family have been better or worse off owning cash, or the relevant stock market’s index instead of the concentrated position?”
Around two-thirds of the time, a concentrated position in a single stock delivered negative absolute returns (which means it underperformed cash). Over 70% of the time, a concentrated position in a single stock underperformed a diversified position its respective main stock market index. The most successful companies did generate substantial wealth over the long run, but only less than 5% of stocks met the definition of “Mega Winners”, which means they outperformed their respective indices by over 500% cumulatively. We also conducted a similar analysis for other exchanges in the region, with broadly similar conclusions.
A SIGNIFICANT NUMBER OF COMPANIES EXPERIENCED LOSSES OR UNDERPERFORMED THE INDEX
% of companies listed from 1992-2022
This table shows an analysis of the FTSE All-Share ex-Investment Trusts Index between 1986 and 2022.
• For Australia, out of 3,754 stocks, 59% had a catastrophic loss, 66% had negative absolute returns, 73% had Negative Excess Returns Vs Index and 5% were “Mega winners”
• For India, out of 2,867 stocks, 42% had a catastrophic loss, 42% had negative absolute returns, 67% had Negative Excess Returns Vs Index and 18% were “Mega winners”
• For Hong Kong, out of 2,810 stocks, 66% had a catastrophic loss, 73% had negative absolute returns, 76% had Negative Excess Returns Vs Index and 4% were “Mega winners”
• For Shenzhen, out of 2,787 stocks, 38% had a catastrophic loss, 43% had negative absolute returns, 70% had Negative Excess Returns Vs Index and 5% were “Mega winners”
• For Shanghai, out of 2,238 stocks, 32% had a catastrophic loss, 46% had negative absolute returns, 63% had Negative Excess Returns Vs Index and 6% were “Mega winners”
• For Malaysia, out of 1,537 stocks, 55% had a catastrophic loss, 62% had negative absolute returns, 69% had Negative Excess Returns Vs Index and 5% were “Mega winners”
• For Taiwan, out of 1,206 stocks, 37% had a catastrophic loss, 46% had negative absolute returns, 74% had Negative Excess Returns Vs Index and 6% were “Mega winners”
• For Singapore, out of 1,164 stocks, 85% had a catastrophic loss, 65% had negative absolute returns, 72% had Negative Excess Returns Vs Index and 3% were “Mega winners”
• For Thailand, out of 1,102 stocks, 39% had a catastrophic loss, 55% had negative absolute returns, 64% had Negative Excess Returns Vs Index and 6% were “Mega winners”
• For Indonesia, out of 923 stocks, 47% had a catastrophic loss, 53% had negative absolute returns, 75% had Negative Excess Returns Vs Index and 9% were “Mega winners”
• For Philippines, out of 395 stocks, 55% had a catastrophic loss, 49% had negative absolute returns, 62% had Negative Excess Returns Vs Index and 10% were “Mega winners”
• Summary: out of 20,783 stocks, 50% had a catastrophic loss, 55% had negative absolute returns, 70% had Negative Excess Returns Vs Index and 7% were “Mega winners”
A Review of Business Failures: Case Studies
While business-specific failures arising from shortcomings in management may seem obvious and inevitable in hindsight, many instances of failure may arise from sectoral, regulatory or macro factors that were outside of the management team’s control. As with Agony, this section contains a selection of notable business failures over past decades. We have grouped these case studies into three broad categories: sectoral shifts, regulatory and market uncertainties, and macroeconomic risks.
Read the full report to find out more
1 Michael Cembalest. “The Agony & The Ecstasy”, Eye on the Market. Data as of March 12, 2021. 
2 UBS, PwC. Data as of July 31, 2020..
3 Michael Cembalest. “Dearly Beloved”, Eye on the Market. Data as of June 7, 2022.
Index Definitions
The Hang Seng Index ("HSI"), the most widely quoted gauge of the Hong Kong stock market, includes the largest and most liquid stocks listed on the Main Board of the Stock Exchange of Hong Kong.
The Straits Times Index (STI) is a market capitalization weighted index that tracks the performance of the top 30 companies listed on SGX.
The Hang Seng TECH Index ("HSTECH") represents the 30 largest technology companies listed in Hong Kong that have high business exposure to technology themes and pass the index's screening criteria.
The MSCI Golden Dragon Index captures the equity market performance of large and mid-cap China securities (H shares, B shares, Red- Chips and P-Chips) as well as securities classified in Hong Kong and Taiwan. Currently, the index also includes A stock connect large and mid-cap shares.
Standard and Poor’s 500 Index is a capitalization-weighted index of 500 stocks. The index is designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries. The index was developed with a base level of 10 for the 1941–43 base period.
STOXX Europe 600 Index (SXXP Index): An index tracking 600 publicly traded companies based in one of 18 EU countries. The index includes small cap, medium cap, and large cap companies. The countries represented in the index are Austria, Belgium, Denmark, Finland, France, Germany, Greece, Holland, Iceland, Ireland, Italy, Luxembourg, Norway, Portugal, Spain, Sweden, Switzerland, and the United Kingdom.
TOPIX also known as the Tokyo Stock Price Index, is a capitalization-weighted index of all companies listed on the First Section of the Tokyo Stock Exchange.
The MSCI AC Asia ex Japan Index captures large and mid cap representation across two of three Developed Markets countries (excluding Japan) and eight Emerging Markets countries in Asia. With 609 constituents, the index covers approximately 85% of the free float-adjusted market capitalization in each country. Developed Markets countries in the index include: Hong Kong and Singapore. Emerging Markets countries include: China, India, Indonesia, Korea, Malaysia, the Philippines, Taiwan and Thailand.
The CSI 300 is a capitalization-weighted stock market index designed to replicate the performance of the top 300 stocks traded on the Shanghai Stock Exchange and the Shenzhen Stock Exchange.
The MSCI China Index captures large and mid cap representation across China A shares, H shares, B shares, Red chips, P chips and foreign listings (e.g. ADRs). With 740 constituents, the index covers about 85% of this China equity universe. Currently, the index includes Large Cap A and Mid Cap A shares represented at 20% of their free float adjusted market capitalization.
The Nikkei 225 Index comprises 225 stocks selected from domestic common stocks in the first section of the Tokyo Stock Exchange, excluding ETFs, REITs, preferred equity contribution securities, tracking stocks (on subsidiary dividend), etc., other than common stocks.
The MSCI China Real Estate Index is designed to capture the large and mid-cap segments of the China equity markets. Currently, the index also includes Large Cap A shares represented at 10% of their free float adjusted market capitalization. All securities in the index are classified in the Real Estate Sector according to the Global Industry Classification Standard (GICS®).
Markit iBoxx USD Asia ex-Japan China Real Estate High Yield Index family is designed to reflect the performance of USD-denominated bonds issued by non-investment-grade, real estate entities domiciled in China. The index rules aim to offer a broad coverage of the universe for USD denominated bonds from Asian issuers, while upholding minimum standards of investability and liquidity.
The SSE Composite Index also known as SSE Index is a stock market index of all stocks (A shares and B shares) that are traded at the Shanghai Stock Exchange.
RISK CONSIDERATIONS
- Past performance is not indicative of future results. You may not invest directly in an index.
- The prices and rates of return are indicative as they may vary over time based on market conditions.
- Additional risk considerations exist for all strategies.
- The information provided herein is not intended as a recommendation of or an offer or solicitation to purchase or sell any investment product or service.
- Opinions expressed herein may differ from the opinions expressed by other areas of J.P. Morgan. This material should not be regarded as investment research or a J.P. Morgan investment research report.
- For illustrative purposes only. This does not reflect the performance of any specific investment scenario and does not take into account various other factors which may impact actual performance.
- All case studies are shown for illustrative purposes only and should not be relied upon as advice or interpreted as a recommendation. They are based on current market conditions that constitute our judgment and are subject to change. Results shown are not meant to be representative of actual investment results. Implied performance is not a guarantee of future results.
