Passive investment creates inefficient allocation of capital
Active fund managers have significant investment opportunities as the large flow of capital into passive index funds and exchange traded funds (ETFs) has created liquidity and pricing abnormalities, according to Greencape Capital.
The boutique investment manager said the three largest ETF and passive fund providers made up in excess of nine per cent of the share registry of stocks included in the ASX 20.
Greencape portfolio manager, David Pace, said: “With the index already highly concentrated, passive funds continue to pour in, directing more capital into companies based on their position within the index, regardless of their underlying fundamentals”.
“We see this as an inefficient allocation of capital that creates pricing abnormalities and provides significant investment opportunities for active managers,” he said.
“The opportunities for active stock pickers to capitalise on mispriced companies are greater than ever.”
Pace said a willingness to deviate from the index combined with extensive company visitation resulted in an optimal portfolio of risk-adjusted ideas.
“Without the requisite proprietary analysis, it’s risk taking for risk taking sake,” he said.
The firm’s portfolio manager, Matthew Ryland, said Greencape’s funds focused on analysing what was really going on in companies and verifying observable facts, to enable high conviction investment decisions.
“We take a long-term view of stocks where we believe the market is not pricing correctly. In some cases, the market avoids risk rather than price it. In other cases, the market undervalues the ability of an effective management team to create value through efficient capital allocation,” Ryland said.
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