It’s never been more important than today to construct a portfolio that does not look like the index, according to Larry Pitkowsky, co-founder of GoodHaven Capital Management.
Pitkowsky co-founded GoodHaven Capital Management, a registered investment advisor providing investment management services to individuals, institutions and other clients, in 2011. He is the co-managing partner and co-portfolio manager of GoodHaven along with Keith Trauner.
Prior to forming GoodHaven, Larry was affiliated with Fairholme Capital Management, and from 1999 through 2008, he held a variety of roles at Fairholme, including analyst and portfolio manager.
Pitkowsky sat down with ThinkAdvisor to discuss GoodHaven’s investment philosophies.
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“If people want an index-like portfolio, there’s lots of very inexpensive ways to have an index-like portfolio,” he said.
But, he added, to get a different result in the market over time, “you need to look different.”
It’s vital to look less like the index (not more) given that passive and index funds don’t consider valuation when buying, according to Pitkowsky.
The flood of money over the past few years to passive has been “dramatic,” as Pitkowsky called it.
Passive funds are taking market share from active managers at an accelerating pace. Active funds experienced significant net outflows in 2016, losing more than $340 billion of assets. Passive funds benefited, gaining more than $500 billion in net inflows.
The flows into passive investing may be approaching “dangerous” levels, according to Pitkowsky.
“You can never tell when something that seems excessive will change,” he said. “However, without lobbing any complete criticism against passive, we would say it would seem to us that accelerating that move in the last couple years seems potentially dangerous to us.”
Pitkowsky is hesitant about a move into an asset class that is “trading amongst its highest valuation point at any time except for the dot-com bubble.”
“What concerns us — first, as citizens and observers —is that an acceleration into passive over the last couple years … at a time when the market averages are at high levels by any measure,” Pitkowsky explained. “The S&P at 19x earnings, the highest price-to-sales ratio since the dot-com bubble. Highest price-to-EBITDA ratio since the dot-com bubble.”
This is why Pitkowsky recommends that investors who are concerned about risk and downside should be looking for portfolios that are much more attractively priced than the index.