Uh-oh, small passive won't work

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pkcrafter
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Uh-oh, small passive won't work

Post by pkcrafter » Tue Nov 14, 2017 6:11 pm

Well, you can guess who wrote this--an active company. In this case it's TRPrice. There is some interesting facts in the report, so worth a look. TRPrice is one company that continues to fight indexing. They do have a few index offerings like S&P500, but ER is 0.23%
Declining Number Of Traded U.S. Equities Impacts Small-Caps

The reduction in quality and liquidity of companies included in the small-cap indexes amid relatively high valuations poses significant risks for passive investors.
See Pg 4

https://individual.troweprice.com/stati ... eport-fall


Paul
When times are good, investors tend to forget about risk and focus on opportunity. When times are bad, investors tend to forget about opportunity and focus on risk.

Jack FFR1846
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Re: Uh-oh, small passive won't work

Post by Jack FFR1846 » Tue Nov 14, 2017 6:20 pm

Well, we'd better just let those professional people handle all our money. I guess Dell as a public company was in such horrible shape that they went private. Not like those who put their money into buying Dell thought that they were buying a great company, or something. They were crying so hard that they accidentally bought EMC and made that part of the private company too. And Intel buying Altera and NXP buying Freescale and Qualcom buying NXP and Broadcom looking to buy.......

I could go on and on just in my familiar tech sector. When I worked for the evil empire, Darth Vader said that in less than 20 years, there would be only 2 analog IC companies. We're sure heading that way. The result? Less companies whose stock you can buy. But wait. If you want to buy Unitrode or National or Burr Brown or Benchmarq, you simply buy TI who acquired them all. Or if you want to buy SMSC or Micrel or Supertex or Atmel, you just buy Microchip who bought all them.

In the end, those small and mid cap companies are now part of a bigger (maybe mid or large cap) company.

Do these guys have a clue at all?
Bogle: Smart Beta is stupid

wolf359
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Re: Uh-oh, small passive won't work

Post by wolf359 » Tue Nov 14, 2017 8:09 pm

Actually, I agree with the premise of the article (just not it's conclusion). There actually is a big reduction in the number of stocks being traded (at all levels, not just small caps.) Market capitalization is being very heavily concentrated in a few very large companies. I'm not sure it's good for the economy, or the United States in general. However, this is not actionable, at least by me.

The fact that small cap dollars are chasing fewer small cap stocks does increase the valuations. Even Vanguard's small cap funds have a lot of companies that are better characterized as mid caps.

But I'm not sure why active has a better shot outperforming in that type of market. Active managers are still fighting other highly qualified active managers. The costs of researching companies is not cheaper when covering small caps. Execution costs of an active manager trying to trade small caps are still greater than those of an index fund, especially because of the relatively smaller float. It doesn't take as big of a trade to increase a spread for the small caps (the active funds can easily move the market by buying or selling.)

So the main point is that there may be structural imbalances in the market. None of those imbalances favor active.

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baw703916
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Re: Uh-oh, small passive won't work

Post by baw703916 » Tue Nov 14, 2017 8:20 pm

If a company isn't publicly traded then active funds can't buy it either.

Now maybe that could be an argument for investing in private equity...but that's beyond the scope of this thread.
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Lindawilliams1960
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Re: Uh-oh, small passive won't work

Post by Lindawilliams1960 » Tue Nov 14, 2017 8:21 pm

More money is available in the private market. There is not the same need for companies to go public.

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