Client Portals

Individual Securities Vs. Indexes: Investing’s biggest competition3 min read

Dec 24, 2019 - John Osbon ( 4 mins to read)

John Osbon

Nothing is more central to our economy than competition. Competition rewards innovation, smart investments and cost control. We see competition between local restaurants and between global giants like Amazon and FedEx. We also see — and benefit from — competition between divergent ideas and business methods. In the investment world, the competition between stock pickers and indexers has been raging for decades. Here’s the state of the race today.

David becomes Goliath

There has been healthy and increasing competition between buyers of individual securities and creators of indexes for at least 40 years. In the late 1970s you could count your index fund options on one hand. Now indexing is a dominant force in investing, led by huge firms like Vanguard, Blackrock and State Street.
Each year indexers continue to gain more investors and dollars. Stock picking is not dead, but is becoming more the exception than the rule it had long been. There’s no sign of this trend reversing. Some predict that in as few as ten years the only individual security buyers and holders could be hedge funds and some very wealthy entrepreneur creators like Bezos, Gates, Zuckerberg and so on.

Huge cost advantage

What’s behind the success of indexing? It delivers market level performance at very low costs. In fact, the cost of indexing has been going straight down for at least ten years. The cost includes management (traditionally very low) and trading (now free). Low costs help RIAs like Osbon Capital deliver what our clients need, and have enabled index providers to amass huge asset levels. For example, Blackrock, which did not start out as an indexer provider, is now one of the largest with $7 trillion of assets under management.

Where now?

We can’t predict the ultimate outcome of this competition, but what is clear is that individual security ownership will shift away from the liquid, publicly-traded fund area into the private fund area. We see this already among individual investors. New accounts transferring to us from big asset managers often have well over 50% of the money indexed, along with some private investments.

Self-indexing

In the next decade we foresee investors creating their own indexes. These self-indexes will only be available to wealthy people. For example, we foresee a $1m private index of 100 US growth companies or 100 International dividend payers or 100 recession-proof stocks. To put together a diversified portfolio of several self-indexes will probably require $5-10m dollars. Of course, there will be few costs to assemble these indexes and the creator has the benefit of an individual basis in each stock.

The new decade

Since we begin a new decade next week it is a good time to examine how your portfolio fits the new era of competition. How much have you indexed? Are you holding single or concentrated securities in companies you built or invested in early? It’s healthy to assess the pros and cons of such holdings periodically.

And what about other asset classes? Does indexing also work in the bond area? How about real estate? Please contact us if you would like to see how we view the competitive landscape. We are in the early stages of developing several self-indexes for the next decade.

WEEKLY INSIGHTS
delivered to your inbox

DISCLAIMER

This communication may include forward-looking statements. All statements other than statements of historical fact are forward-looking statements (including words such as “believe,” “estimate,” “anticipate,” “may,” “will,” “should,” and “expect”). Although we believe that the expectations reflected in such forward-looking statements are reasonable, we can give no assurance that such expectations will prove to be correct. Various factors could cause actual results or performance to differ materially from those discussed in such forward-looking statements.”

“Historical performance is not indicative of future results. The investment return will fluctuate with market conditions.

Past performance is not indicative of any specific investment or future results. Views regarding the economy, securities markets or other specialized areas, like all predictors of future events, cannot be guaranteed to be accurate and may result in economic loss to the investor.

Investment strategies, philosophies, allocations and holdings are subject to change without prior notice.

This communication is intended to provide general information only and should not be construed as an offer of specifically tailored individualized advice.

While the Adviser believes the outside data sources cited to be credible, it has not independently verified the correctness of any of their inputs or calculations and, therefore, does not warranty the accuracy of any third-party sources or information.

Adviser does not endorse the statements, services or performance of any third-party vendor.

Unless stated otherwise, any mention of specific securities or investments is for hypothetical and illustrative purposes only. Adviser’s clients may or may not hold the securities discussed in their portfolios. Adviser makes no representations that any of the securities discussed have been or will be profitable.

Any IPO alerts are purely informational and should not be construed as recommendations to invest.

Adviser is not licensed to provide and does not provide legal, tax or accounting advice to clients. Advice of qualified counsel or accountant should be sought to address any specific situation requiring assistance from such licensed individuals.

Any case studies or hypothetical client profiles are for demonstration purposes only. They illustrate the breadth and depth of the many clients we represent at various life stages. Any similarities to actual Adviser’s clients past or present are strictly coincidental. Individual advice and results will vary based on each client’s circumstances, objectives and prevailing economic conditions.