January 9, 2014
Dear Valued Partner,
On behalf of all of our Horizon Kinetics colleagues, we would like to wish you a Happy New Year. 2014 is a special year for our firm as it marks the 20th anniversary of our founding in 1994. We appreciate the loyalty of our clients for making this all possible.
The asset management industry has consolidated significantly since our founding. According to Pensions and Investments, the Top 500 managers (of which we rank 412th) manage $68 trillion, with the Top 10 managers managing almost $19 trillion or approximately 28% of the total1. It’s hard to imagine how the largest managers can be nimble enough to deliver the differentiated results investors seek. It appears to us that the biggest managers are heavily reliant on ultra-liquid, high capacity strategies largely driven by a ‘digital’ thinking generation of investors. This ‘digital herd mentality’ creates significant investment opportunities for value investors. As we have written on many occasions, we firmly believe investing is a social science where the behavior of market participants shapes outcomes and returns. Despite this, Wall Street and the broader investment community continue to create countless financial products that seek to precisely engineer risk and return like a physical science – a proposition we have taken strong exception to over the last 20 years.
Our value approach remains committed to taking advantage of the equity yield curve combined with our time-tested predictive attributes. Our research team is extremely busy and focused on capitalizing on opportunities being created by the consistent footprints of the ‘digital herd.’ One such ‘digital footprint’ relates to indexation and the presumed virtues of low-cost passive investing. Market participants continue to allocate to ETFs with voracity. Over the last 10 years, assets invested in ETFs have ballooned from $151 million to $1.6 trillion2. This increasing allocation is altering valuations and outcomes as the indexes use individual equities and bonds as raw material inputs for their rules-based criteria. Fundamental business and security analysis is extinct in this context, replaced by rules-based inclusion criteria and top-down quantitative exposure measurement and control. For example, are you aware that most indexes avoid or underweight two of our long-standing predictive attributes - owner-operated companies and spin-offs? And thank goodness they do. We believe many investors do not recognize the significance of these limitations and may miss valuable investment opportunities as a result.
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