Passive

The iShares MSCI ACWI ETF is some $18bn, and change. It’s big. One of the biggest ETFs out there and one that has hoovered in allocations as money men go for the skinny fee – albeit a not so skinny 32bps – and comfort in knowing that they are going long global equity. Long the world. Or as the official marketing puff puts it “access to the global stock market in a single fund”. Job done. Only that when the hood is popped, it doesn’t seem much like a means to “diversify internationally” at all. Of the top twenty positions, it is only TMSC and Novo Nordisk that are not listed in the US. Indeed, more than 60% of the 2,348 holdings are stateside. So less ‘world’ more ‘US’ and, a US that is arguably, in some areas, over the skis expensive. As money has flooded into such products over recent years, it is only a small number of mega-cap stocks that have been able to absorb such flow, and so the share prices go up. Up and up, irrespective of whether the price may whisper ‘overvalued’. Perversely, the more overvalued a company becomes, the bigger the market capitalization, and the more bloated the weight in the index. More buying. Holders sleep safely at night, as the performance of the index is what it is, it is the benchmark, it is what global equities do. The index though is grossly distorted, and it is not just the iShares MSCI ACWI ETF where such top-heaviness and concentration risk lies, relative that is, to what the sticker on the tin says. The question is, what happens in the event of something breaking, if the machines that have been relentlessly buying, relentlessly riding the ZIRP wave and B-ing-TDs, turns around. Stops. Goes on sale. Where, then, are the buyers? Active managers are not likely going to stand in the way. One of the more interesting approaches of some active investors of late, has been to ensure that portfolios are, in part, ‘off index’. Or invested in companies which will not be exposed to indiscriminate selling, should the taste for passives go sour. It may yet prove to be a savvy move.