This what Ted's thinking, active management today is a single decision, comes from a few

conversations I've had recently with CIOs about the underperformance of long-only managers

who are underweight the magnificent seven. It got me thinking about the ramifications of stock index

concentration on active management. About 20 years ago, I sat down with the leading long-short

hedge fund in Korea. The portfolio manager spent 40 minutes offering an articulatable case for

Samsung, in which he held a 20-percent long position. When he finished his impassioned presentation,

I responded with a single question. That sounds great, but why are you net short Samsung?

The manager had a long book comprised of individual stocks and a short book comprised of

Kaspi Index Options and Futures. Samsung comprised

40% of the Cosby Index. His fund was 100% long and 60% short. So despite the seemingly

large 20% long position, he effectively had a 24% short position through the index and was 4% net short, his favorite stock.

The concentration of the Kaspi Index was wreaking havoc on his bottom-up stock approach to security

selection and position sizing. Since the GFC, the underperformance of active managers has been

a repeated refrain. Index funds have been the

beneficiaries, with Vanguard leading the pack and overseeing $7 trillion in assets. The flow of funds

to indexes has also been the correct market call. The S&P 500 compounded at 12.2% for the last five years,

and 13.8% over the last 14, far surpassing most

markets around the world and its long-term returns of 10.9% over the last 50 years.

The driver of this soaring index performance has been the magnificent seven.

These technology-enabled businesses emerged as

the winners of the internet, capturing the lion's share of all the economics created from the

technological revolution. Their business success translated into stock performance as well.

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