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Is index investing ‘the worst thing an investor can do’?
In a changing world with global growth declining, index investing might’ve outlasted its relevance, a fund manager has suggested.
Is index investing ‘the worst thing an investor can do’?
In a changing world with global growth declining, index investing might’ve outlasted its relevance, a fund manager has suggested.
In conversation with nestegg, Hyperion executive chairman Tim Samway explained why he believes that in a changing world, index investing “is the worst thing an investor can do”.
“There was a period where index investing worked. But what we have seen with the deterioration of world growth, many broad-based indices have really become full of low-quality businesses.
“In the past, they benefited from economic tailwinds. That is, there was a big period of economic growth, there was falling interest rates, there was technological adoption that made businesses more efficient and an increase in globalisation,” Mr Samway explained.
The fund manager believes that those weaker businesses at the bottom, which will fail to grow in the future, dilute the profits of stronger businesses for investors.
“A lot of those tailwinds have turned into headwinds. The majority of the indices are full of businesses that will struggle over the next 10 years in this new competitive environment.”
“The problem is that indices are created on a combination of past performance and liquidity. Businesses that are still large, liquid and well held take a long time to drop out of industries,” Mr Samway said.
As a result, the losers in that formula are those who remain exposed to them as they go backwards.
“There’s plenty of businesses whose earnings still have not recovered pre-GFC highs on a per share basis because they had to issue so much new capital to stay liquid in the period after the GFC.”
“Passive investing is dead, completely dead. There are all these businesses that just rely on GDP growth to pump out next year’s earnings growth.”
“Their sales growth depends on GDP growth. They are non-competitive businesses, they haven’t kept up with the new competitive order and, as a result, they just rely on the economy being strong and just rely on the middle spending more money than last year. Frankly, that is not going to happen,” Mr Samway said.
However, the fund manager does not believe investors should “throw a dart at the board” and try to pick winners either. He suggests investments should be left to the professionals.
“The stock market is a process of transferring wealth from the amateurs to the professionals,” Mr Samway concluded.
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