Asia ex-Japan Equity: Letter to Investors

Sustainability. We mean it.

Insight

5 February 2025 |

Active ESG

The apparently unstoppable growth of passive assets – via exchange traded funds (ETFs) – presents a considerable challenge to active contrarian fund managers (like us). In this letter, we discuss how this powerful dynamic favours momentum stocks and how the outperformance of such stocks might run out of road.

Asia ex-Japan Equity: Letter to Investors 2025

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In both developed and emerging markets, passive inflows have been consistently positive, and the trend appears to be accelerating. By design, stocks selected by active managers are ‘pounced upon’ by cash-flush passive investors driving the price of these popular stocks up further.
However, we believe that the market’s heavy tilt towards momentum investing – led by ETFs – is leading to divergences between price and value that, for many stocks, has become untenable.
At some point, the valuations of most overstretched momentum stocks will fall – as they are aggressively sold by active investors at a faster rate than they are being bought by the follow-on passive investor base. In this letter, we consider how the momentum trade might unravel.