The RAFI Growth Index selects companies based on high percentage growth but weights them by the absolute dollar magnitude of that growth. This prevents tiny, speculative companies with explosive percentage gains from dominating the index, instead favoring firms with a larger, more stable economic impact.

Despite strong AWS growth, Amazon is seen as lagging in the AI race compared to its peers. This makes it a compelling investment, as its AI-driven growth has not yet fully materialized. This perceived gap provides the most upside potential as it catches up and integrates AI more deeply.

Despite Microsoft's massive AI investments, its stock only grew 4%, while NVIDIA's market cap soared. Investors punished Microsoft's heavy capital expenditure, favoring NVIDIA’s high-margin, fabless "picks and shovels" approach that captured immediate AI profits without the same infrastructure risk.

Big Tech's sustained outperformance presents a portfolio anomaly. These companies are simultaneously the largest market components and among the fastest-growing, a rare combination that breaks historical patterns where size implies maturity and slower growth, forcing managers to adapt.

The underperformance of active managers in the last decade wasn't just due to the rise of indexing. The historic run of a few mega-cap tech stocks created a market-cap-weighted index that was statistically almost impossible to beat without owning those specific names, leading to lower active share and alpha dispersion.

Microsoft is caught in the middle of the cloud wars. It lacks the scale of AWS and is being outpaced by Google's AI-driven cloud growth. With its exclusive OpenAI distribution rights gone, Microsoft struggles with a narrative to convince investors it has must-have AI products beyond Azure.

While indexing made competition tougher, the true headwind for active managers was the unprecedented, concentrated performance of a few tech giants. Not owning them was statistically devastating, while owning them reduced active share, creating a no-win scenario for many funds.

The market for hyper-growth tech companies now exists almost exclusively in private markets, with only 5% of public software firms growing over 25%. With companies staying private for 14+ years, public markets are now for mature, slower-growing businesses.

The high valuations of mega-cap tech stocks are predicated on the idea that their growth is unique. However, data shows numerous companies, both in the U.S. and internationally, are growing at similar or even faster rates. This competition for growth should logically put downward pressure on the Mag-7's multiples, a key tenet of a bubble.