In a recent commentary for the Polen Focus Growth strategy, we highlighted our thoughts around changes in market structure that may impact the relative performance of our portfolios during the next significant drawdown in equities. In the commentary, we raise the prospect that our relative investment performance in the immediacy of the next major market drawdown may not be as strong as we have seen in past bear markets, when we saw our Focus Growth portfolio protect substantial capital.
Protecting our clients’ capital is at the core of our investment philosophy and represents the crux of our mission statement. To be clear, our expectations that the advantages of our portfolio of high-quality businesses will continue to be evident during the next bear market in equities and beyond remain unchanged. Rather, what concerns us is that the market structure has changed due to the massive surge of capital flows into passive indices, ETFs and other trend-following strategies over the past several years.
These changes have implications for our portfolio performance that may not be apparent until the next significant pullback in the equity market inevitably occurs. The focus of this paper is the shift in market structure due to the massive surge of capital flows into passive indices and its potential short-term effects on our relative investment performance.