Shift To Passive Increases Correlations


    The shift to passive investing has had some surprising results, says William J. Booth, managing director, portfolio manager, and senior research analyst at Epoch Investment Partners. In fact, it may be affecting market dynamics, he said at the ‘Focusing on what you can control when investing in public equities’ session at TD Asset Management’s ‘Sharing of Knowledge Learning Series 2017.’ Academic findings show high levels of passive investing have raised correlations across stocks, reducing the diversification benefits of all styles of equity investing. With the ability to diversify risk falling, markets have grown more fragile and stocks in indexes are more expensive than non-index stocks because of the amount of money moving to passive funds. While investors cannot control the market environment, they can control how they invest. It is essential that investors look at companies through a financial lens where a company’s value is based on free cash flow generated, not an accounting lens since earnings are “an opinion,” he said. “Cash is a fact.”