Data: The top 200 mutual funds have combined assets under management (AuM) of $5.5 trillion invested in U.S equities. These mutual funds are segregated by key fund objectives such as market size, fundamentals and are benchmarked to mainly four popular Index sponsors; S&P Dow Jones, MSCI, Russell, and CRSP.

Market Capitalized Benchmarks: In 1975 when Vanguard set up the first indexed mutual Fund, the Vanguard 500 Index, few industry leaders questioned the efficiency of benchmarking to the S&P 500 market capitalization methodology. Back then, weighting the components by Size (Market Capitalization) seemed the appropriate way to build an Index and a portfolio to match the index. Today, the Smart Beta industry is built on the misleading assumption that any weighting mechanism outside market capitalization is the optimal way to construct a portfolio, but Smart Beta has failed to win the argument against market capitalization-based weighting mechanisms, the top AuM funds still rely on market capitalization benchmarks to allocate capital.

Inseparable Size and Factors Lead to Inefficient Investing: The inseparability of the Size factor from Fundamental Value and Growth factors might not seem obvious, but the leading benchmarks are carved twice, first from Size and second from the fundamental factors. As the market metrics evolved over the last century, the fundamental factors became overlaid on Size. The fund objectives of the top AuM funds reflect this even today. Large, Mid, Small, and Broad are categorizations in Size while Blend, Value, Growth are categorizations in fundamental factors. Importantly, the market is inefficiently built around a combination of Size, Value, and Growth Factors, thus positioning many investors to be over weighted because of the overlapping constituents.

The pie chart below summarizes the U.S. Equities Investment by the top 200 mutual funds showing 96% is allocated by dollars to pure Size and fundamental factors. The remaining 4% is allocated to sectors and regions where even there the Size and Factors bias exists. The Size and Factor biases are inseparable.

Overexposure: The most optimal way to expose to such a Universe is either through Value/Size, Growth/Size or Blend/Size. However, the industry does not follow such a complementary approach. Instead, to the ongoing detriment of investors the investment industry continues to overexpose to the same Size and Factor biases therefore over allocating and creating unmanaged risk. This inefficient universe construction leads to a suboptimal portfolio construction and management and over concentration which leads to investors investing in the same fund style twice.