The alpha opportunity in U.S. equities

A common view is that a highly transparent and efficient market for large-cap U.S. equities has made alpha difficult to achieve. Yet research from BlackRock Fundamental Equities finds that top-quartile managers have been able to deliver alpha across time. And given an outsized U.S. weighting in global equity indices, even a small amount of U.S. large-cap alpha could multiply to meaningful portfolio return potential.

Key takeaways

• A U.S. alpha imperative? Attractive top-quartile alpha and outsized index representation give U.S. large caps a potential alpha edge.¹
• Why now? An environment of increased market dispersion can mean greater potential for skilled stock selection to generate alpha.
• What to consider. Time horizon and manager track record are important considerations for allocators.

An underappreciated portfolio building block

Growth in passive strategies has presented asset allocators with more options for building their U.S. equity exposure. The active/passive debate is not new, but 2023 marked a milestone when total assets in global index equity funds overtook active for the first time.²

We’ve increasingly seen portfolio construction principles tout the merits of indexing core allocations to large-cap U.S. equities and building specialty allocations around them, often in the form of active positions in more complex or nuanced markets and asset classes where manager skill is more richly rewarded.

The rationale is that public market large-cap U.S. stocks operate in a highly efficient and transparent marketplace where data is abundant and quickly priced, leaving little opportunity for alpha generation from off-benchmark calls. There is also a widely held and empirically grounded view that the median U.S. active manager does not outperform consistently, thus arguing for indexing of the U.S. equity exposure.

Our analysis challenges this thesis and instead suggests that avoiding an active allocation to large-cap U.S. equities means forfeiting important portfolio return potential.