By: Scott Davis
The world has changed, we all know that, but even obvious change has a way of sneaking up on you. The current bull market, for example,has created stark imbalances and contrasts. Tech on one extreme of alpha generation, oil/gas or traditional auto on the other. And even within winning sectors there are wide variations in success as disruption breaks down traditional correlations – Microsoft vs. IBM, Visa vs. Citigroup, Amazon vs. The Gap, and closer to home for us…Honeywell vs. GE as examples. When I started in this business, mega cap was $100B and quite rare; the equivalent may be $1 trillion very soon. $100B may be the new cutoff for high relevance with 65 companies now reaching that threshold (an amazing 60% of the S&P 500 index cap). This dynamic has furthered the passive/active dislocation. Any active manager who has survived the past decade most likely was on the right side of the disruption debate – mainly via mega cap Tech. Two decades ago that required going far down the market cap curve to emerging growth stories. That is no longer true. Passive gets a free ride in that reality.
Truth is, despite consolidation, rising margins, and overall solid results the past 5+ years, industrials have struggled to maintain momentum and continue to shrink vs. the S&P.
So what does this mean for the next 5 years?