Citi: Concentrate on the Large Caps

by: FP Trading Desk

Diversification might be the goal most investors strive for because it reduces risk. But Tobias Levkovich, chief U.S. equity strategist at Citigroup, believes that concentrated portfolios could be more attractive than the entire S&P 500 in the near future.

“The risk management mindset amongst portfolio managers that has resulted from this past summer’s market correction has forced many to consider more diversification as a method of reducing the threat of considerable losses,” he said in a note to clients. “Yet, it may be more worthwhile to focus on a more concentrated group of names. Diversification may not be as helpful now, especially if [U.S.] large caps continue to outperform.”

His contrarian views revolve around the idea that the vast majority of stocks in the S&P 500 beat the index between 2000 and 2005, since smaller-capitalization companies outperformed the larger caps. This could be changing now that large cap stocks are regaining a leadership position in the index.

“We expect continued strength in large caps given various catalysts including weaker earnings growth, higher volatility, wider credit spreads and increasing consumer delinquencies,” Mr. Levkovich said.

As a result, large cap names like General Electric (NYSE:GE), Oracle (NYSE:ORCL) and Intel (NASDAQ:INTC) could beat a diversified portfolio of U.S. stocks.