J.P. Morgan released data this month that $90 billion has been pulled from active funds in public equity markets in 2019, while $39 billion flowed into index-style funds. Passive funds (including quant funds) now control a whopping 80% of equity assets. Passive investing has won the public markets.
This makes sense when you consider that public markets operate on transparency of information to the market. The natural end-condition, then, is for algorithms to assess and trade based on the open pipe of information.
Private equity, by contrast, relies on insider information. The company data Shearwater assesses is deeply private by nature.
In this context, there is no possibility for index investing to take root. The fund’s quality of deal flow, assessment, and assistance will determine the performance of their fund.
Why does this matter? Well, most money that’s now being invested in public markets will tend to trend towards the mean (which is unsurprising given an index’s aim is to replicate the market).
To outperform, you need to go private. No surprise then to read that Hostplus has recently upped its internal co-investment fund from $50m to $350m, while private equity and venture in Australia now has a record $30b under management.