“Only when the tide goes out do you discover who’s been swimming naked.” ~ Warren Buffet

“The investor’s chief problem — and even his worst enemy — is likely to be himself.”~Benjamin Graham

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As the charts below highlight, the dominance of passive investing has turned into a one-way massacre for active managers, killing price discovery and making it increasingly difficult for active managers to generate better risk-adjusted outcomes for clients. While regulation have played a major role, the real drivers are human behaviour — narratives and inertia. The rise of passive has created a feedback loop that further weakens the ability of active investors to generate alpha. The sheer scale of capital moving into passive strategies distorts market signals, reinforcing trends rather than rewarding fundamental value.

One of the most striking narratives today is that of ‘U.S. exceptionalism’. Despite the world knowing this is a fallacy, capital continues to flow relentlessly into U.S. markets at the expense of all others. The ultimate momentum trade. Call it long-termism, buy-and-hold, or the AI-revolution — it’s all the same song. But when the music stops, the door is only so big. The increasing concentration of market capitalisation in a handful of names exacerbates the risks. Liquidity can be an illusion in such an environment, as recent history has demonstrated.

We caught a glimpse of this in late January. The China-related news that sparked a sudden sell-off wasn’t even particularly bad, and positive conclusions quickly resulted in a rebound. But in those brief hours, billions were wiped out, reminding us of the fragility lurking beneath the surface. Momentum stocks plunged 4% in minutes, while value stocks remained largely indifferent to the chaos in ‘imagine-land.’ The rapid nature of these corrections underscores just how vulnerable momentum-driven markets have become. It also raises critical questions about whether the passive-driven concentration of capital is creating a house of cards rather than a resilient market structure.

Regardless, it serves as a important reminder that valuations matter. Growth and opportunity should always be considered, but for non-yielding assets like growth equities, the price at which you buy and sell at, is the sole determinant of your realised returns. Investing requires discipline and an understanding of the true value of an asset. While momentum-driven growth stocks may seem like an easy path to positive returns, their valuations will ultimately dictate their fate when sentiment shifts.

As we navigate this environment, our systematic approach remains focused on adapting to evolving economic regimes while mitigating risks associated with overcrowded positioning. Price, fundamentals, and a robust risk management framework remain our guideposts—especially as the passive tide continues to distort market dynamics. While others chase the prevailing trend, we remain committed to a process that seeks to identify true value and manage risk effectively. By maintaining a disciplined approach, we aim to navigate this environment with a focus on sustainable, long-term performance.

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