Friday 05 March 1999
ENDLESS COLUMN inches have been penned over the last year on the tyranny of the benchmarks - not least on these pages. These musings were topped off this week by an excellent report, "Tomorrow's Giants", which alarmingly draws attention to the way indexation of investment is favouring a small group of well-capitalised, global, mega-stocks at the expense of smaller companies. The authors, Craig Pickering, a former Treasury civil servant, and Brian Basham, a public relations consultant, describe this process as a type of collective mania, which of course it is.
Even active fund managers have felt obliged to follow what Tony Dye of Phillips and Drew calls "closet indexation". Positions held by many active fund managers have been greatly narrowed relative to the benchmark, if only because this seems to be the only way of keeping up with the overtly indexed passive funds. Almost everyone is indexing in some shape or form. Alone among the big UK fund managers, Phillips and Drew has remained entirely loyal to its active investment principles, and it has paid a heavy price in terms of lost business for doing so.
It is just possible, however, that last year was the high water mark of the swing to passive investment. Most active fund managers are concerned in the extreme at the lack of value to be had at the top end of the market. They are sceptical about the merits of indexation, even though they have been driven to it out of necessity. There's been a massive correction and rebound in between, but in essence the FTSE 100 share index has gone nowhere for six months now, which is powerfully indicative of growing alarm about overvalued larger stocks.
As yet, there is little evidence of attention switching back to the small cap sector, but it will come. Smaller companies are one of the few areas of the market where there is still good value to be had. As the active fund managers come back into the smaller-company sector, that will create its own benchmarks, and the passive funds will have to follow suit.
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