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| Quarter | Letter Date | Fund Name | QTD | YTD | Tickers | Themes | Quick Take |
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"Passive investing has reached dangerous extremes with three funds holding $2.6Tn and top-10 S&P 500 names representing 38-39% of the index. Computer-driven momentum has detached pricing from fundamentals, with negative-earnings companies outperforming and Nasdaq volatility spiking."
The manager warns that passive investing has reached dangerous extremes, with the three largest S&P 500 funds now holding $2.6Tn and Vanguard alone surpassing $1Tn. The top-10 holdings account for 38-39% of the index, forcing passive investors to buy yesterday's winners regardless of valuation. Information Technology has dominated for nine consecutive years, but history shows no sector remains on top forever. Warning signs are emerging: Nasdaq 100 volatility has spiked to multi-year highs while companies with negative earnings outperform those with positive earnings. The manager argues this momentum-driven, computer-dominated market structure detaches pricing from fundamentals and will end in tears. When the selloff comes, the same algorithms that bought will sell indiscriminately. The manager positions defensively by investing substantially in sectors underrepresented in major indices, particularly energy and commodities, which are expected to outperform over the next 5-10 years. While timing the dislocation remains impossible, the manager accepts near-term underperformance risk to avoid the concentration dangers of passive index exposure.
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