Activist Investing - One Way To Avoid Extinction

Sep. 28, 2017 2:31 PM ETAINC, CEQP, IOTS, NFLX, NRG, OPRX, TURN2 Comments
Bruder Capital, LLC profile picture
Bruder Capital, LLC


  • Momentum algos and low-cost ETFs are rolling over money managers.
  • An activist strategy still outperforms on a risk-adjusted basis.
  • Hop aboard the activist train - but pick the right conductor.

If you are reading this, presumably you are seeking alpha, that is, you are looking for the premium an investment portfolio earns above a benchmark like the Standard & Poor's 500. Positive alpha for a stock means it is undervalued relative to other stocks with similar systematic risk, and the better a portfolio manager like you is at that job, the more positive your portfolio’s alpha. Alas, obtaining positive alpha for flesh and blood stock pickers like you has become considerably more difficult as the structure of the stock market has changed.

Some market analysts believe you are also facing extinction. In June, JPMorgan analysts estimated that discretionary stock traders now account for a mere 10% of trading volume and that most traders no longer buy or sell stocks based on specific fundamental valuations. Passive and quantitative investing accounts for 60% of daily trading volume, more than double the figure from a decade ago. In August, Bloomberg reported that, for the first time, the $28 billion average daily value of transactions in the three main ETFs tracking the S&P 500 Index is about to exceed the average turnover for all of the separate stocks within the benchmark itself.

The graph below compares the summation of the traded value (price multiplied by number of shares) of S&P 500 index members versus the traded value of the S&P 500 ETF (SPY).

As the graph indicates, investors have been moving sharply toward ETFs that mimic benchmark returns since 2007. The financial crisis created a spike in volatility that also increased correlations between different asset classes. Although that movement has decelerated, pessimists think ETFs will eventually remove all research-driven value investors. They believe the stock pickers will ultimately all fall victim to automated, day-trading, computer-driven strategies. Optimists argue that stock picking isn’t dead, it’s just that the nearly 1,400 different types of ETFs

This article was written by

Bruder Capital, LLC profile picture
Three decades of capital markets experience: institutional trader for Lehman Brothers, M&A banker at Merrill Lynch, research, sales and trading positions at KeyBanc, RBC Capital Markets, and BNP Paribas, private equity valuation consultant for PwC.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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