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ID 350316889 @ Artemii Siabro | Dreamstime.com
In June 2024, Capital Group, the largest active manager of US stocks, said it would “diversify away from its core equity franchise to stem client withdrawals,” according to a Reuters story. Reuters said Capital Group had five straight years of outflows including $100 billion from its equity funds in 2022 and 2023. It’s because Passive funds have surpassed Active ones for assets under management. Capital’s Growth Fund of America is the largest actively managed fund with about $300 billion of assets. But it’s a net seller. Top holdings: META, MSFT, GOOG, AMZN, AVGO, NVDA, AAPL, TSLA. Cost to investors: 61 basis points.
The largest passive fund is the Vanguard Total Stock Market Index. Assets, about $1.8 trillion. Top holdings: AAPL, NVDA, MSFT, META, GOOG, AMZN, AVGO,TSLA.
Cost: 4 basis points. They own the same things but Capital Group costs 15 times more. I looked up 13F holdings for the largest 25 owners of US stocks. Capital Group is the only strict active manager left. And it’s a net seller. The rest are hybrids now, or passives, asset-allocation managers.
And get this: Three of the top 25 are proprietary trading firms with nearly $2 trillion of
13F positions last quarter, most of that in puts and calls. They’ve passed stock pickers! Asset managers buy products, not stories, the herd, not the outliers. They’re after the opposite of stock-picking.
When I was a young tight-skinned investor-relations guy, I crafted an investment thesis that differentiated our company from thousands of other choices. I highlighted our value drivers (return of capital, strong balance sheet, disciplined cost management) and growth drivers (network technology, pricing power, M&A).
If the c-suite executed on the plan, and we communicated our success consistently and well, we would – presto! – create shareholder value.
Issuers still do the same things. Tell the story. Target buy-and-hold investors.
Differentiate. Make those earning releases pop! Deliver alpha!
Marc Rowan, CEO and co-founder of Apollo Group, told CNBC’s Andrew Ross Sorkin at the Economic Club of New York in June of 2023: “There is no alpha in public equities. Eighty-five to 93% of active managers don’t beat the benchmark.”
Alpha is outperformance versus the same risk, and it doesn’t exist. Stock-pickers like Capital Group see outflows because they don’t outperform the S&P 500 (which is beta). And you can buy the performance of the stock market – beta – for a few basis points.
What’s more, Blackrock, Vanguard, State Street, don’t seek alpha. They buy beta.
That’s why over the past fifteen years active managers have seen a swing of $500 billion to $1 trillion annually. First Trust says in the 12 months ended September 30, 2024, Actives lost $300 billion from US equities while Passives picked up over $400 billion. A $700 billion swing.
The bane of Passive investment is volatility. Every earnings season public companies spend tens, maybe hundreds, of millions of dollars flooding the wires with headlines and data that create volatility. It’s anachronistic. Nothing gets you booted from baskets like a 10% move up or down.
So, be beta. Every public company needs a proactive, intentional PASSIVE strategy
because that’s what most of the money is now. You can’t talk your way into an index
fund. But you CAN do the things that make that index fund see you as a great product.
At the top of the list is changing how you report earnings. Don’t pump out gobs of data for machines to turn into volatility that boots you from Passive funds. Stop selling horses and wagons to an automobile market.
By Tim Quast. Quast is the founder and President of the longtime Virtual Chapter sponsor
ModernIR.com, a premier provider of analytics and services for today’s quantitative stock
market. For more information, please visit modernir.com.
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