Charles Stanley’s Morgan: beware of passive concentration


Charles Stanley Direct investments analyst Rob Morgan says investors need to be aware of the risks of stock concentration that come with some tracker funds.

Morgan identifies markets that tend to be concentrated towards the largest companies they host and in some cases a market over-exposed to one or a small number of stocks can impact upon performance.

For example, Morgan indicates passive funds tracking the Russian market may contain around 20 per cent exposure to Gazprom and therefore have over 50 per cent in the energy sector overall.

”It is a similar story in Brazil with the index skewed to heavyweights Petrobras and Vale.”

Morgan says: “Unless the passive fund imposes maximum limits on stock exposures, which are usually pretty high in the case of exchange traded products, it ends up being highly concentrated.

“In more mature markets individual stock concentration is not so much of an issue, but you can still find yourself unwittingly skewed towards particular sectors. In my view, the dominant, more fashionable sectors are not necessarily where you would want a large portion of your portfolio invested as they often go on to underperform.”

However, Morgan feels the proliferation of passive funds may assist active managers and says: “The more ‘dumb’ money there is in the market, the more anomalies there should be for active investors to exploit.”