Gannon in NYT: "The Ease of Index Funds Comes With Risk"
article 10-13-2015

Gannon in NYT: "The Ease of Index Funds Comes With Risk"

Co-CIO Francis Gannon talks to The New York Times about how small-cap valuations have been impacted by passive investing.

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On October 9, 2015, as part of their Third Quarter 2015 Mutual Funds Report, The New York Times ran an article examining both the potential and pitfalls of passive investing, the latter especially evidenced in the bull market of the past few years. 

According to Norm Alster, author of "The Ease of Index Funds Comes With Risk," the large shift to ETFs, coupled with a nearly correction-free bull market, has created a valuation gap between those stocks within an index and those outside it.

Additionally, stock valuations within many major indexes—including the Russell 2000—are being elevated regardless of metrics, such as price-to-book ratio.

"Stocks that might not be bought singly on their own merits have been lifted by the package buying," writes Alster. "Some portfolio managers, academics and market trackers now contend that the soaring of the mediocre alongside the exceptional has produced unusually elevated valuations," he added. 

Co-CIO Francis Gannon, who was quoted in the article, said he believes that on top of many investors' preference for passive investing, the Fed's quantitative easing policies have also contributed to boosting the share prices of those companies whose debt and low to no earnings would have otherwise kept the value of their stock at more realistic or reasonable levels.

"The growth of passive investing in the small-cap space has supported the non-earners in indexes like the Russell 2000," said Francis.

Francis Gannon has 22 years of investment industry experience. He joined Royce in 2006.

Read the full article at NYTimes.com

Important Disclosure Information

The thoughts and opinions expressed in this piece are solely those of the person speaking and may differ from those of other Royce investment professionals, or the firm as a whole. There can be no assurance with regard to future market movements.

This material is not authorized for distribution unless preceded or accompanied by a current prospectus. Please read the prospectus carefully before investing or sending money. Investments in securities of small-cap companies may involve considerably more risk than investments in securities of larger-cap companies. (Please see "Primary Risks for Fund Investors" in the prospectus.) Russell Investment Group is the source and owner of the trademarks, service marks, and copyrights related to the Russell Indexes. Russell® is a trademark of Russell Investment Group. The Russell 2000 is an unmanaged, capitalization-weighted index of domestic small-cap stocks. It measures the performance of the 2,000 smallest publicly traded U.S. companies in the Russell 3000 index. The performance of an index does not represent exactly any particular investment, as you cannot invest directly in an index.

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