The New Economy and the Return of Alpha. The ongoing debate between Passive and Active investing has been raging for quite some time. Proponents of Active investing theorize that excess returns above the broader market, or Alpha, can be achieved by taking an active hand in investment selection. Conversely, believers in Passive investing espouse the idea that equity markets are efficient and simply investing in indexes will prove to be the best approach in the long run. At TrueMark, we happen to think both sides are correct…to a point.
There are many areas of the market where passive investing makes sense. If an investor wants to gain exposure to the broad US equity market, a collection of mature and efficient industries, there are few things better to deliver this than an S&P 500 index fund. However, at TrueMark, we believe that the burgeoning New Economy has created a class of nascent economic segments that are just beginning to progress up the maturation curve. These younger economic segments are heavily characterized by inefficiencies. Where inefficiencies exist, there will most definitely be winners AND losers. These types of inefficiencies also represent a tremendous opportunity to capture significant capital appreciation. We believe that the most effective way to maximize the potential Alpha of these New Economy asset classes is through the Active management of our portfolios by credible investment experts, supported by the deep industry knowledge of our advisors.
Nascent Asset Classes Offer Opportunities. When examining New Economy segments such as Artificial Intelligence and Cannabis et al, we see rare long-term potential. In our opinion, the question facing these areas is not IF they will become large, profitable and significant portions of the economy, but WHEN. The premise of our investment philosophy begins with identifying areas of the New Economy that should significantly disrupt existing industries. That disruption has the potential to exceed market growth in revenue, profit and share price. Fundamentally, this is how we would define “nascent” asset classes. We believe that Artificial Intelligence will disrupt the existing revenue structure of the Information Technology sector and Cannabis should create a similar disruption in certain Consumer Products, particularly Alcohol and Tobacco. The sheer size of the sectors that are being disrupted means that the opportunity for players in these asset classes is momentous in the long run.
Not All Disruptive Companies Are Created Equal. An active approach to investing is particularly relevant in the asset classes of the New Economy. The companies operating in these industries are attempting to change the landscape of the economy, either by offering completely new products or by fundamentally changing the way their industries operate. When this happens, the monetary opportunity is enormous for all participants. But these industries are still in their early stages, and the possibility of tremendous gain attracts many participants. Some of these companies will succeed and some will fail. The potential winners will have the kind of experience, personnel, industry reach and relationships that increase the likelihood of their success. Other “pretenders” will not have these advantages and are less likely to succeed. When constructing and maintaining a portfolio in a New Economy asset class, expertise in the field is essential for portfolio managers to identify and avoid the ‘pretenders’ while focusing investment on those companies that are best positioned to succeed over the long term in these highly competitive spaces. TrueMark’s portfolio managers rely on lengthy investment experience, industry-specific acumen and the expertise of our Industry Advisors in actively positioning our portfolios to fully realize the long-term secular return opportunity of the New Economy.