Time to Pay Attention

The talk of changes in the retail sector over this year has been unending.  Be it the “Amazon Effect” being amplified by the acquisition of Whole Foods and how that will change the grocery industry, how the societal effects of the “shared economy” or the aging demographics will impact consumption trends, or the continued weakness in retail sales and string of bankruptcies, most recently with Toys R Us filing last week, it is clear that there are systemic shifts going on in the retail sector.

As an investor, do you think there is no reason to pay attention to any of these changes?  An entire industry—and an industry as a whole that is a massive employer in the United States—is in the midst of transformation and it doesn’t matter in terms of the securities you are buying?  It may sound silly to frame the question that way, but in essence, that is what passive investing entails.  With passive investing, the manager does not have the mandate to pay attention to changes in industries, society, demographics or the economy and consider how those changes will impact individual holdings.  Instead they are modeling/tracking a broad index for a certain asset class.

Yes passive investing involves lower fees and in certain market environments and periods, we do see passive investing outperforming active investing.  But we believe that over the long run, active management can provide alpha to investors by capitalizing on and adapting to these changes.  There are winners and losers, and there have been over the history of markets.  Today, we are in the midst of major changes in terms of politics, regulation, fiscal policy, societal behavior, and demographics, among others, and we believe this is the sort of environment where it pays to be paying attention and have the flexibility to adapt, especially in the high yield market in which we operate as an active fund manager.

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