Almeida said passive investing is having an even stronger impact on the market as investors chase the big tech companies that dominate Wall Street's benchmark indexes. He said his clients are “skeptical, but they fear that they will continue to not participate, which means they will continue to underperform.”
Mr. Robert Almeida of MFS.
But more broadly, he argues, index investing significantly dilutes capitalism. Rather than allocating opportunities to whichever opportunities offer the best risk-adjusted returns, capitalism instead results in investors effectively buying up the companies with the largest market capitalizations.
Almeida acknowledges that some of these primarily tech giants are highly profitable companies. “However, new financial plumbing and a growing disconnect between prices and fundamentals do not mean stocks are not significantly overvalued.”
And perhaps more importantly, some of these technology giants may eventually face disruption or even obsolescence due to artificial intelligence. But are those risks factored in?
Almeida is acutely aware that he risks appearing like a whining incumbent manager who can't beat the index. Not only do passive investment strategies have much lower fees, why pay an active manager to limit the downside when a central bank can do it for you? – but also their historical performance. Much better.
In 2023, 60% of active U.S. managers failed to meet their benchmarks, according to S Corporation data.&P. Australia's data is even worse. In 2023, his 77 percent of active managers failed to meet their benchmarks, but over 15 years that number jumps to a staggering 85 percent. The MFS Global Equity Trust (not managed by Almeida), available in Australia, has underperformed its benchmark over one, three, five and 10 year horizons.
But Almeida, like the two fry, is concerned that investors may not realize that water temperatures have changed beyond 2022. The urgency of the energy transition is increasing. Increasing geopolitical tensions are making margin-enhancing offshoring difficult. And China's ability to drive global economic growth has declined significantly.
If things get worse this time, as this week's U.S. consumer price index and Thursday night's rising producer price data suggest, and central banks can't come to the rescue for whatever reason, such as inflation remaining sticky, What will happen?
“I have no doubt that that's what central banks want to do to bail out. What I question is the durability with which they can do it,” he said. Masu.
Changes in market sentiment and repricing of risk assets can be rapid and brutal, and can be exacerbated by the concentration of large-cap stocks in passive strategies.
“What I fear, and why I'm so defensive, is that when the market turns around, it changes so quickly that I can't prepare my portfolio for it. So I feel safe not having to chase it.
“Financial markets are a mechanism for transferring risk, but they are also a mechanism for transferring wealth over time from impatient people to patients.”
The difficulty for active managers is that the scoreboard can seem very conclusive. Passive strategies have outperformed active strategies not just for two years, but for 20 years as well.
Yes, Almeida's concerns about the risk of congestion are valid, and logically we can say that there is momentum that has pushed up large indexes such as S.&For the P500 to rise this much in such a short period of time could further accentuate the economic downturn.
Indeed, the amount of money being invested without much regard for fundamentals or risk-adjusted returns is greater than ever before, and that's worrying when there are so many risks stacked against each other at the same time.
Look at the new S&P data released Friday morning shows that global corporate credit defaults are the second highest on record, or as Almeida points out, gold has hit record levels even though bond yields remain high. It shows that it is rapidly increasing. Does it signal the end of US hegemony?
Given that stock market valuations appear to be wildly over-the-top, there is a clear argument for caution, or at least reflection. And active managers should be able to deliver higher returns in markets with greater dispersion between the best and worst companies.
At this week's Australian Financial Review Business Summit, Wei Li, a global strategist at passive investment giant BlackRock, spoke about the importance of investors as we emerge from what she calls the “post-Great Moderation.” It is worth noting that he declared the need to be more selective about asset allocation. Global financial crisis period.
But will this weaken investors' apparent obsession with passive strategies? The key here is the investor's time frame. Almeida is right that investors looking to chase overheated markets should be wary of adopting passive strategies that move with more exaggerated momentum than usual. However, over the long term, passive strategies have been able to weather market changes, and investors are likely to remain persistent.
