The landscape of equity investing has undergone significant changes in recent years, posing challenges for active portfolio managers.
The dominance of a few major players in the stock market has raised questions about the effectiveness of traditional strategies such as diversification and stock selection. Historically, diversification has been considered a key investment strategy, but the current market dynamics challenge this approach.
Momentum investing has gained traction, leading some to question the need for diversification. The concentration of market performance in a handful of stocks has made it difficult for active managers to outperform the index. As a result, many managers have adopted a strategy known as "index hugging" to limit the risks associated with not owning the largest index-weighted stocks.
Simulated portfolios have shown that the majority of active portfolios underperform the index, highlighting the challenges faced by active managers in identifying winning stocks. The current market environment is not unprecedented, and active management has faced similar difficulties in the past. However, market conditions can shift, and active managers must remain adaptable.