![]() You get a similar conclusion when you look at the drawdown statistics. And, even if your holdings were to be spread across these extra funds, the average correlation would barely change. These five funds account for nearly three times the level of assets under management held by the next five largest active funds in the category. To quote The Terminator (1984), “This is not good”.Īn investor splitting their portfolio equally between these funds may feel they have achieved some diversification whereas, in practice, the funds’ performance has been so similar, that the diversification benefits would be minimal.Īnd this is where the money is. On average these largest five funds are 90% correlated with each other. This is a large and widely used category of funds that includes the classic 60/40 benchmark I took the largest passive fund as a proxy for the benchmark, alongside the four largest active funds.Īs of the 31 st May 2023, these five funds combined held £28.6bn of UK savers’ money with a heavy skew towards the passive offering from Vanguard: However, to verify whether this is a true problem, I looked at five of the largest funds in the Investment Association’s 40-85% equity fund sector. Valuation data suggests that this is indeed what has happened – valuation spreads within the stock markets are still close to record highs suggesting a big gap remains between the cheapest and most expensive stocks. ![]() The above two phenomena feed off each other, as the selling pressure in the underperforming stocks continues.Meanwhile, more flexible managers adapt to be more in keeping with the times (I remember an institutional consultant telling me a couple of years ago how EVERYONE now described their philosophy as “Quality Growth”).Managers who are running a contrarian style underperform the benchmark and gradually lose more and more clients as the trend continues.At least three “convergence dynamics” kick in: To understand why, consider what happens when markets trend strongly for long periods of time. I have become increasingly suspicious that many investors may not be as diversified as they think they are. Inflation and interest rates rose significantly around the world and there is little evidence to suggest that portfolio managers, or clients, have done anything to adjust their portfolios accordingly.Įven more concerning is that the behaviour of markets over the last decade may have caused a convergence in how portfolios are positioned. The result was that long duration investments such as long-term government bonds and growth stocks benefitted disproportionately. It is now widely recognised that the period since the credit crunch of 2008-9 was highly unusual in economic terms: interest rates were very low, and QE-driven money-printing forced investors to chase yield. I believe that a similar example of this resistance to change is posing a risk today, this time to the safety of UK investors’ portfolios. Since then, there has been a steady decline in casualties.Īs financial writer Morgan Housel loves to point out, it can take a surprising amount of time for social norms and attitudes to change in response to what are, at least with hindsight, obvious improvements: the modern seatbelt was introduced back in the 1960s! Despite an average of 2,700 people dying every year in car accidents in the UK, seatbelts only became mandatory in 1983 and back seat passengers had to wait until 1991 to be officially strapped in. Ah, the 80s: the music, the movies and…the utter disregard for road safety.
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