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Passive investors are ‘patsies’, claims Evan-Cook
by Robert St George on Oct 16, 2013 at 09:50
Simon Evan-Cook, a multi-asset manager at Premier, believes a move towards passive investing ultimately serves to benefit active investors who can take advantage of predicted share price moves.Evan-Cook (pictured) contended that as index trackers are generally obliged to own every stock in the market, they could be manipulated by active participants suddenly buying large tranches of shares in a company. This would push share prices up, increase their weighting in a market-cap index, and so force tracker funds to buy more shares, at which point the active participant could sell out at a profit.
‘Passive investing is like playing poker with your cards face up,’ Evan-Cook explained.
‘In the stock market, other investors know exactly what tracker holders are going to buy, and when they’re going to buy it. Bet this way at a poker table and you’ll find yourself very popular with the other players, but very poor too. In the investment world, these open-hand passive gamblers have been flocking to the table, which is great news for the best closed-hand players.’
Evan-Cook added that as investors dumped poorly performing active funds to go passive, they were serving to streamline the active space as weak funds had to close.
‘To bring it back to poker, what we’ll be left with is a table that consists solely of two sides: the best players and the patsies,’ Evan-Cook said. ‘I know which side I want to be on.’
The manager rejected the notion that this would in fact be positive for the best active funds, though. ‘I’d emphasise the fact that weak active investors are bad in lots of unpredictable, uncorrelated ways,’ he commented.
‘Passive investors, in contrast, are all bad in the same completely foreseeable pattern. And what is more, their co-ordinated actions are likely to reshape the market itself, like pedestrians synchronising their steps on a previously unwobbly bridge. That makes a big difference.’
Should a crash occur in such circumstances, Evan-Cook expressed confidence in the long-term resilience of the active approach.
‘We will continue to invest in assets whose real-world fundamentals have been checked by a talented and genuinely active manager,’ he stated. ‘They will recover their value after a flash Black Monday crash. Overvalued assets - held only because we were copying our neighbour - will not.’
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