Doubling down on his recent comments at the SIAA conference, PM Capital founder and investment chief Paul Moore has argued passive dominance is not only inflating valuations of index-heavy names – such as CBA locally or the Magnificent 7 in the US – but it is also undermining the markets’ price discovery function.
“Passive allocations, particularly from industry super funds in Australia, continue to channel capital into concentrated holdings without regard to valuation or fundamentals,” the CIO told InvestorDaily.
According to Moore, several investment managers operating under the active label are actually “closet indexers”, which is to say they charge active fees despite hugging benchmarks. This, he said, is creating a systemic distortion where valuation signals are being ignored.
“This autopilot behaviour risks leaving investors exposed, especially as the macro backdrop (rising inflation, fiscal indiscipline and geopolitical realignment) becomes less forgiving of such complacency,” Moore said.
Within global equities, the investment chief argued that tariff-induced volatility is revealing significant valuation gaps across the asset class. He noted that as passive flows continue to concentrate capital in top index names, a growing number of attractively priced companies are being overlooked.
“This dislocation has created fertile ground for active managers to act with conviction,” Moore said.
“PM Capital, for instance, has selectively rotated into names such as Heineken, Cointreau, Newmont Gold, and European industrials – each based on a clear valuation thesis. These opportunities are only visible through detailed company-level analysis, underlining the importance of active management in today’s bifurcated markets.”
‘It’s not enough to be on autopilot’
Also arguing the case for active management, Jaime Kiehn, managing director and product specialist at Principal Asset Management, said the post-COVID-19 market has become characterised by extreme volatility across growth, value and core equities.
Such environments enable active managers to exploit market swings and valuation mismatches, Kiehn said, noting that the same cannot be said for their index-tracking counterparts.
“After two strong years of equity returns, where the S&P 500 surged by 25 per cent, many investors may have become complacent, and this complacency can lead to a rude awakening,” the managing director said.
“In recent weeks, passive strategies, by definition, captured 100 per cent of the tariff-sparked market downturn in their respective indexes, leaving passive investors vulnerable during corrections and bear markets.”
Australia’s superannuation funds, for example, suffered two consecutive months of negative returns due to ongoing concerns around US President Donald Trump’s tariff announcements.
Namely, the median growth fund – those holding 61 to 80 per cent in growth assets – experienced a modest pullback of 0.9 per cent in February, followed by a subsequent decline of 1.9 per cent in March, according to Chant West data.
“It’s not enough to be on autopilot with a passive strategy,” Kiehn said.
Like Kiehn, Moore, too, believes passive managers have become complacent amid downturns.
Asked if passive managers are on autopilot, he told InvestorDaily: “Yes, explicitly and critically.”
“The biggest risk going forward is that passive won’t give you an acceptable rate of return,” Moore said.
Meanwhile, the environment for active managers is “increasingly favourable”, especially for those prepared to deviate from the benchmark, remain patient and anchor decisions in valuation, Moore said.
“In short, while volatility persists, it is precisely this turbulence that is setting the stage for active management to reassert its relevance and value.”
However, Stockspot CEO Chris Brycki has resisted these arguments, stating in a recent market note that volatility does not guarantee success for active managers.
“Something you can be quite sure of now that markets are volatile again is that you’re going to hear a lot of active fund managers say that it’s a stock pickers’ market,” the chief executive said.
He instead argued that these claims make “absolutely no sense”.
“The key point to make is that you will never see these claims backed up with any evidence at all. The evidence actually shows that during periods of market turmoil, active fund managers do just as badly as they do in periods of market stability. In fact, they underperform just as much in both types of periods,” he said.
According to Brycki, in order for active managers to succeed, they instead need a combination of low volatility, high dispersion and high correlations – an environment he asserts only occurs 2 per cent of the time.
“So the 98 per cent of the time that this environment doesn’t exist, it’s very, very difficult for active managers to perform well.”
