Investors warned against passive investing “complacency”: Orbis

Global equity manager, Orbis Investments, has flagged its top five investment considerations for 2025, encouraging investors to re-position their portfolios “for a changing investment world”.

Orbis said its five areas investors should have their eye on when planning for 2025 and beyond are underpinned by strong analysis of long-term data, in an effort to push investors out of their “complacent” reliance on passive and growth strategies.

“Throughout 2024, we have seen developments in global markets that amplify concentration, style, and return risks,” Eric Marais, Investment Specialist at Orbis, said.

“Many investors continue to structure their portfolios around last year’s winners, but we believe investors should now consider what needs adjusting – most likely their portfolios and their expectations.”

Consideration 1: ‘Periods of great returns historically give way to periods of poor returns’

Marais noted that while passive world index investors celebrated returns of 11 per cent after inflation in the 10 years leading up to 2021, the decade leading up to 2008 saw investors lose two per cent after inflation. He said the returns are generally at their lowest “when starting valuations are expensive”. He warned investors to be prepared for a much more challenging decade ahead, given the previous decade’s record of “phenomenal stock market returns”.

Consideration 2: ‘Returns on passive global equity investments could be as low as zero for the next decade’

The data collected by Orbis, consisting of valuations dating back to the 1970s, indicated that “extreme valuations” had been generally followed up with poor returns.

“While valuations are a poor predictor of short-term returns, they matter a great deal in the long run,” Marais said.

“Our research suggests that passive investors in global equities could expect a return as low as zero, after inflation, in the next decade if historical relationships hold.”

Consideration 3: ‘Indexing is a momentum strategy by stealth’

Marais also noted the poor historical track record of the most-expensively-valued companies that tend to forfeit their leadership positions and market capitalisation when bubbles burst, leaving certain passive investors scrambling.

“[While indexing can be] a huge benefit to passive investors through the persistent trending market of the last decade but a danger when the trend reverses,” he said.

Consideration 4: ‘Concentration risk is extreme’

Marais also said the market environment has been plagued by market indices’ heavy skew towards growth strategies. The world’s supposedly most diversified major index, the MSCI All Country World Index, has 17 per cent invested in just the ‘Magnificent Seven’ companies, 25 per cent in technology sectors, and 64 per cent in a single country and currency – the United States.

“Each of these three areas is more richly valued than its opposite. The US market trades at 27 times earnings versus 16 times for shares elsewhere, while tech shares are valued at a whopping 39 times earnings”, he said.

Consideration 5: ‘Active strategies don’t guarantee diversification’

Orbis also encouraged investors to re-think their allocation to style-driven active funds. Considering the top 10 largest actively managed global equity funds, 66 per cent of active assets are in Growth strategies and 34 per cent is in Core; none are attributed to what Morningstar’s Equity Style Box methodology calls a Value style.

“Investors may hold active funds for diversification but depending on the underlying investments, they may be diversified in name only and are at risk when the dominant style falls from favour,” Marais said.

“Investors need to diversify across styles within equities. Markets in aggregate are expensive but not uniformly expensive and plenty of value remains available globally for active stock pickers. Holding undervalued assets can make a remarkable difference to investors’ returns in downcycles.”