Passive is not the perfect cure
Jun 14, 2022
In the US market, passive investment strategies replicating the performance of the market have overtaken the strategies actively picking individual stocks. With all advantages these strategies have, investors are currently discovering the dangers of having all market participants owning the same names. Firstly, we believe indexing is the ultimate momentum play as new capital goes into yesterday’s winners who increase their weight in the index. Secondly, price finding mechanism are disturbed as stock prices moves loose their relationship with the underlying fundamentals of the companies. Thirdly, it is self-fulfilling strategy as investors underperforming the passive strategies are “forced” into replicating the benchmark to keep their jobs exuberating all market excesses. At ECP, we actively pick individual companies trading below what we believe is the fair value of these businesses. This is how we attend to generate returns for our investors over time.