I don’t know if it’s better to be the Wildebeest or the Hyena. But there’s safety in the herd.
That’s one conclusion from my NIRI Senior Roundtable panel last Thursday with Simplify Asset Management chief strategist Mike Green (who is now also the economics rockstar recasting the poverty line – more on that later).
It wasn’t Mike’s notion, mind you. Mike’s widely followed research on markets leads to his conclusion that the dominant driver is Passive money. It’s taken over. For better or worse. It’s become the thing that matters most.
The Wildebeest thing was mine. I said, paraphrasing, that investor-relations – fostering relationships on The Street – has always been about differentiation. How do we make ourselves stand out? What’s our unique investment thesis? Why should investors buy our stock?
That leads to a frenetic industry built on Telling the Story. We must target new investors. Shape the message. Refine the deck. Hold an Analyst Day.
And of course, report financial results every quarter.
But we live in a giant Prediction Market. Everything is a thing to bet on. The market is run by machines. Derivatives abound – they’re far bigger in notional value than the dwindling number of public companies forming the bedrock for all the things derived from equities: puts, calls, futures, swaps, on it goes. And yes, ETFs, with $13 trillion of assets in the USA, over $18 trillion globally.
And here’s a fact. Most of the money runs on models. And when I say “most,” I mean 60-63% of assets according to Morningstar, the Investment Company Institute and others is now passively run. That’s not counting Active managers who mimic – closet-index – Passives (that probably pushed the number near 75%).
Active money is a shrinking minority. Active money is a net seller. Think about that. Every year, Active managers sell more than they buy. They have outflows.
Against that backdrop, companies reporting results expend herculean effort to stand out. I described it as a Wildebeest darting away from the herd and taunting the hyenas.
You’re asking to be set upon ravenously.
Not only is that a disservice to your Active holders who buy-and-hold, but it brains your Passives with tracking errors, deviations from the benchmark. If you’re the piston firing differently from the rest in the statistical sample, you’re promptly removed from the sample.
So don’t do that! Change how you report earnings to reflect the dominance of Passive flows, which need the HERD, not the outlier. Stay with the herd.
And recognize that in a Prediction Market every data point you provide to machines is a reason to jerk your stock around. So be careful and picky about what machine-readable data you put out there for consumption.
Back to San Antonio, I asked the audience for a show of hands from members of the S&P 500. There were 6-8 or so. Something near 40% of our client base belongs to it. I said, “Your number one job is to stay in it!”
It’s where 90% of the market cap is. You’re like a tenured professor. You don’t have to publish papers anymore because you’ve got it made. Unless you screw it up.
We like serving members of the S&P 500 as we can help them implement a strategy for attracting and keeping Passive money. But that concept applies to all issuers no matter your market cap.
Have a plan for attracting and keeping Passive money. There are a surprising number of controllables. And you should think carefully about how your capital-allocation strategy helps or harms Passive money.
Don’t let your Active holders, who care only about higher EPS, buying back stock, returning capital to shareholders, make the decision for you. Think about what Blackrock buys. Because Blackrock, and Vanguard, and State Street, and so on, have the money.
We don’t have to like this market dominated by Passives. You can find plenty of podcasts and the like for what Mike Green thinks of it. The risk is risk. Passives don’t account for it. (Here’s an example on YouTube if you’re interested.)
But unless and until something dramatically changes, public companies must have a plan for creating shareholder value that considers the centrality of Passives to that outcome. Ask us. We’ve given this a lot of thought and study. We have the data.
PS – And Mike Green the economist? He published a Substack piece a couple weeks ago asking if $140,000 is the new poverty line. He backed it up with data. And it exploded. Went viral. He contends that the government’s poverty-line measure is derived from outdated and anachronistic consumer costs. The gauntlet has now been thrown down.
