Private Equity Offers Survival Tactic to Fund Industry in Crisis
(Bloomberg Markets) -- When Niklas Ringby spots a stock worth buying, he ignores decades of diversification advice that most investors live and die by. In the words of hedge fund legend Stanley Druckenmiller, he bets the ranch. The EQT AB money manager’s approach of wagering on just a handful of stocks may sound like excessive risk-taking to a generation of punters warned against chucking all their eggs in one basket, but it’s churning out bumper profits. The $1 billion fund he runs from Stockholm with Fredrik Atting for the private equity giant has gained 35% this year, while European stocks are down 5%, according to an investor letter. That’s on top of the 45% it returned last year.
Ringby’s high-stakes strategy may offer a potential way forward for an industry in crisis. Stockpickers are persistently failing to beat their benchmarks and rapidly ceding ground to low-cost passive funds that just mimic an index. In a world awash with data and computer-driven trading where price-sensitive information is instantly factored into share values, active funds must find a way to stay relevant. That means depth instead of breadth in stockpicking and bolder, high-conviction long-term bets.
“High diversification can be an overkill nowadays,” says Nicolas Roth, head of alternative assets at private bank Reyl & Cie. “Given how passive investing is evolving, it is likely that the future of active management becomes more specialized and concentrated portfolios being one of those specialties.”
Spreading wagers over a large number of bets had been at the core of portfolio management for decades. But that’s led to many managers hugging their benchmarks and producing little or no outperformance after fees, creating a fertile ground for cheaper passive funds to grab market share.
The tide has turned. Last year the investment industry hit one of the biggest milestones in its modern history, as assets in U.S. index-based equity mutual funds and exchange-traded fund eclipsed their active equities rivals for the first time. That gap has since exploded to $285 billion through October, according to Morningstar Inc. data.
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