Beyond big names – from defensive to dynamic portfolios

Anyone who has played or watched a team sport knows that relying on just a few star players is not enough to win a tournament. Great teams succeed because every player has a role: some lead the attack, others defend, and all step up when it counts. A winning strategy is more than putting the best names on the field. It is about adapting the formation to the moment and sharing responsibility across the whole team.

The same holds true for investing. A strong equity portfolio should not depend on a handful of big names carrying all the weight. It needs the right mix of different strengths, roles, and styles that can perform under different market conditions. That is what real diversification means: not just owning more stocks, but building a team that can work together, shift strategies when needed, and stay resilient over the long run. This is the core idea behind our dynamic multi-factor approach, that has been specifically designed for the Swiss equity market.

Over the course of a series of Quanta Bytes, we will take a closer look at how this methodology can improve diversification and unlock stronger, more balanced performance.

In this first article, we begin by looking at the team we are coaching today: the Swiss equity market. How is it positioned? How concentrated is it compared to other developed markets? And what would happen if we rethought the formation?

The second Quanta Byte will dive into factor premia as a smarter way to diversify — going beyond size or simple style labels to focus on what drives returns. After that, our focus will shift to timing. Like in sport, knowing when to lean into certain strengths makes all the difference. We will wrap up by asking what happens when we combine styles. Can blending fundamental and quantitative approaches create a more robust portfolio?

Let us get started by understanding the current lineup and where the Swiss equity market might benefit from a stronger formation.

A team reliant on only a few players

The Swiss Performance Index (SPI) is known for being one of the most concentrated equity indices in the world. Figure 1 shows index concentration based on free float-adjusted market capitalization for different regional indices. For the SPI, Nestlé alone makes up about 13% of the index as of end of 2024. Together with Roche and Novartis, the top three companies account for 37% of the total weight. The top ten names represent roughly two-thirds of the entire index.

That is like sending a team onto the field and expecting three players to do most of the work. They are good, no doubt. These companies are global leaders with strong business cases. But if one of them has an off day, gets injured, or simply does not perform, the whole team suffers. There is not much room for others to step in.

Compared to the SPI, most developed market indices are more balanced, as evidenced in Figure 1. Even the MSCI USA Index, often criticized for the dominance of a few tech giants, is only half as concentrated when measured on market capitalization. Japan and Europe ex-Switzerland show even broader diversification. Within Switzerland, the SPI Extra — which excludes the 20 largest and most liquid names, namely the SMI constituents — already brings more balance to the field.

Too much defense, not enough offense

Every team has players who contribute more to overall performance based on their weight. The Swiss equity market stands out in this respect. However, as any sports coach or portfolio manager knows, success is not just about how many players are on the field or how many stocks are in a portfolio. It is about the kind of players you have and the roles they play that ultimately determine performance.

If we classify stock market sectors (GICS Level I) into the traditional defensive and cyclical categories, we can define Industrials, Energy, Materials, Information Technology, Communication Services, Consumer Discretionary, and Financials to be cyclical. In contrast, Consumer Staples, Health Care, Utilities, and Real Estate are considered to be defensive sectors, because their business model is less sensitive to the overall business cycle.

Taking that perspective, we identify another issue: the players in the SPI represent a defensive strategy. It is built to hold the line during tough times. That can be valuable, especially in periods of market stress. But over the course of a full season — or a full market cycle — teams also need to go on the attack. That is what cyclical sectors do. And most global indices tilt towards them. On average, developed market indices show a 75% allocation to cyclical sectors, as can be observed in Figure 2. The Swiss market, by contrast, is far more conservative, even when we look at the SPI Extra.

This defensive positioning may offer stability, but it limits upside potential. What would happen if we changed the formation?

To test this, we run a simple exercise. We take the 40 largest Swiss-listed companies that have continuously available stock prices between 2003 and 2024. Then we build two portfolios: A traditional portfolio with a balanced 50/50 allocation between defensive and cyclical sectors — matching the strategy (“formation”) of the current SPI Index; and a cyclical-tilted portfolio with an allocation of 75% to cyclical sectors, thus leaving 25% to defensive sectors — matching the strategy most developed markets play. Both portfolios contain the exact same 40 companies. Within each category (cyclical or defensive), the relative weighting of the individual companies is based on their market capitalization.

Not surprisingly, the cyclical-tilted portfolio outperforms the balanced one by a full percentage point per year. Of course, the more aggressive formation has slightly higher volatility and more noticeable drawdowns during crises like 2020 or 2022. But overall, the added return compensates for the added risk and the Sharpe ratio is very similar for both portfolios.

By putting a more offensive formation onto the field, the Swiss team can deliver stronger performance — without sacrificing overall balance.

Time to adjust the game plan

The current formation of the Swiss equity market — with its heavy concentration and defensive tilt — is not a weakness, but it does have a clear strategic impact. We can observe a trade-off: while this setup has delivered solid returns, it limits the opportunity for broader participation and growth.

Our analysis shows that even passive exposure to an index like the SPI is not entirely neutral. Somewhat paradoxically, investors are following a passive strategy that effectively embeds active bets — on safety, through a strong bias toward defensive sectors, and on size, through the dominance of large caps. This is not a challenge unique to Swiss equities. While the SPI stands out as one of the more pronounced cases, similar concerns have emerged globally, with U.S. markets seeing the “Magnificent Seven” rise to account for more than a third of the S&P 500.

Changing the formation, that is, going beyond the big names by dynamically reducing concentration and leaning more into cyclical sectors, helps unlock more of that potential for broader participation and growth. And this is just the first step. Just as successful teams use data to refine their tactics, investors can go further by applying factor strategies. These approaches allow portfolios to adapt, balance different strengths, and stay resilient across market conditions.

In our next article, we introduce factor premia — the key characteristics that help us build smarter, more versatile teams on our journey from defensive to dynamic portfolios. It is where strategy meets data and where performance has room to improve.