The spearhead loses its edge

Boaz Shoshan

Have you heard of a “vanward” before?

It’s a word that’s sadly fallen out of use in recent times, but it actually applies well to financial markets today. In fact, if you’re reading this, you may well be a vanward!

Simply put, a vanward is somebody located in a vanguard. In the past, these were the soldiers at the spearhead of an advancing army.

Today, investors are located in a much different kind of vanguard. But like their predecessors, they may well face bloodshed in the future.

I am referring to Vanguard, the colossal asset manager with more than $5 trillion under management. Vanguard uses passive investing strategies, tracking indexes like the FTSE 100 and the S&P 500 rather than trying to buy undervalued assets or avoid overvalued ones. In tracking an index, it does no research and purchases assets no matter their price or underlying value.

Vanguard hoovered up a billion dollars a day in 2017, from investors all around the globe – from hedge funds to retail investors. If you have a defined contribution (DC) pension plan and take a look at the fund factsheets, you may well find Vanguard there. Just getting on the tube today I was greeted by an advert saying that it is time for me to “wealthify”, and dump my money into a low-cost, passive investment strategy through my smartphone. Unsurprisingly, the first asset manager displayed on the “wealthify” website is Vanguard.

When markets are rising, the illusion that investing is just like a game on a smartphone can continue. But when markets fall, people begin to take these things a bit more seriously – and look for strategies with a more active approach. Passive index-tracking strategies like those provided by Vanguard do not care how expensive individual assets are – they buy assets no matter the cost.

With market darlings like Facebook getting scalped (something we predicted in late March – see “The elimination of desire”), things don’t bode well for the vanwards. Facebook and the rest of the FAANGs (Apple, Amazon, Netflix and Google) are pretty much all that have been dragging the S&P 500 up and rewarding those passively invested in it. If the tech stocks go, the rest of the market is going to need a seriously strong narrative to keep it going up.

And it’s worth bearing in mind that during the US stockmarket sell-off in February, the US Treasuries sold off as well (the opposite of what should happen from a “risk parity” perspective) – there was no hedge to be found by passively investing in US bonds.

The vanwards of the past were experienced, battle-hardened warriors. But Bloomberg reports that more than half of all fund managers have nine years’ experience or less. With no “boots on the ground” experience of 2008, it’ll be interesting to see how they cope when the market bloodies passive strategies, and the charge of Vanguard starts to look like a suicide mission.

Until next time,

Boaz Shoshan
Editor, Southbank Investment Research

Category: Economics

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