Actively Passive

Date Published: 24 July 2017

Category: Investment

Critics say we are not active by ‘just’ investing in ETF index funds, and that index funds buy the most expensive stocks, as the stocks that go up the most become the largest index constituents.  This is false – a stock can go up whilst its fundamentals may rise at an even faster pace, making the valuation lower not higher. For example, during 2011, Apple shares rose but its earnings grew even faster, making its P/E valuation lower (17x to under 11x).

Image showing the P/E and share price of apple

Source: Bloomberg LP


Today, the opposite is true – Apple’s stock has risen whilst its earnings forecasts have fallen (see graph below). The P/E of Apple has consequently risen from 11x at the start of 2016 to over 17x today.


Images showing Apple P/e and Share price 2017

Source: Bloomberg LP

In the world of index funds, there are countless alternatives to a simple market cap weighting. Our asset allocation decisions, based on fundamentals mean we are an active investment manager, save we fulfill our decisions with more liquid, lower cost, more diversified ETFs.

We are also more disciplined and focus on fundamental valuations rather than a mixture of hope and hype.

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