Has passive investment broken value investing?
Has passive investment broken value investing, as argued by Greenlight Capital’s Einhorn? See here.
The logic is clear. By throwing in a wall of money onto stocks, or withdrawing that wall, no matter the valuation or fundamental strength of the underlying company, index investing undermines the signalling function of market prices for the allocation of capital and along with that the efficacy of value investing.
Passive investors – Einhorn’s argument goes on – have no opinion about value, which means that “when money is moved from active to passive, value managers get redeemed, value stocks
go down, it causes more redemptions of value managers, it causes those stocks to go down more and so on”. The conclusion sounds somewhat apocalyptic: “the value industry has gotten completely annihilated”.
There is certainly some truth in this argument, but paraphrasing Mark Twain, reports of our death are greatly exaggerated.
Passive investing in the US, the world’s biggest market, is (for now) only ~50% of institutional equity funds, which means that the remaining US$14.3 trillion of active investing is reasonably
more than enough for the price discovery mechanism to continue functioning. In fact, just a small share of fundamental, active investing would probably do the job.
In general, there is ample evidence that passive and active value strategies complement each other, with passive being often the core of a portfolio and active value a portion allocated for
potential outperformance, thematic exposure and risk mitigation. Today, value investing provides a much-needed counterbalance to passive investing and to investor euphoria about technology stocks.
This is a marketing communication for institutional investors. Please refer to Fund Prospectuses & KIDs before making any investment decision.
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