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In the previous few months/quarters most of the inflows in the market went to index funds and ETF. Passive investment now hold more than a third of all invested assets in the stock market and there seems to be no stopping of the trend.

This has made sound investment strategies and principles look like they are not working anymore. All of the major factors (value, profitability, momentum, low volatility) have had a poor first half of the year because of large inflows into index funds and large outflows out of the rest of the market.

This type of behaviour has been seen before – in 2000’s large majority of the inflows were going into technology stocks, while rest of the market underperformed. In the 60’s there was a mania for blue-chips, huge companies where everybody believed price you pay for the stock is irrelevant since these companies will grow into the high valuations.

This time the story is similar. Everyone seems to care only about fees (large majority of inflows go into the least expensive index funds and ETF) while ignoring valuations, different investment strategies or even asset classes. The first part is totaly understandable – fund managers have on average lagged the market when measured by indices, therefore they should either lower their fees, offer more alpha or the investors will move to passive investments. And they seem to be doing the latter.

Short term underperfomance of sound investment strategies is one of the reasons why they bring high risk-adjusted returns in the long term. Investors in passive investments are basically making an active bet that they will avoid stocks with certain characteristics, like value, quality or momentum, and by doing this they are giving away a large portion of future returns.

Investors with long investment horizons, like us, are fully aware of the possibility of short term underperformance and are even eager to invest more in superior investment strategies after they have underperformed – being a contrarian can pay off really well if you are positioned correctly and investing with a strong economic and logic intuition that offers high returns is one of the best ways to do this.

Equity markets finished June lower, MSCI World lost 1,17%. The Fund lost 0,82% of it value.