Last week, we listened to a great podcast by TheDutchInvestor🕸️ with guest René Sellmann. We found ourselves thinking about some topics they brought up.
Link to podcast episode below.
One of them was the outperformance of index or momentum strategies. It’s hard not noticing this as an individual investor spending hours upon hours researching, when the passive strategy of just “owning everything” beats even seasoned investors with good track-records, like Terry Smith in recent years. His fund, Fundsmith, just added momentum to their investing criteria, likely an attempt to react to “changing times”. Reading their letter, it seems they view the index trend as something that will persist forever.
You’ll find our take on this below, we’d love to hear what you think as well.
Morningstar’s Direct Asset Flows chart of the US clearly illustrates how significant the trend of passively managed funds have been in the US since 2016 — with money flows clearly going to one place, and that’s not to Actively Managed funds.
However, an individual investor, without the burden of worrying whether their fund business is alive next year, can do like Charlie Munger would and invert this problem.
— What opportunities come when most of the market is looking one way?
We shared two such opportunities in the recent months, with EQT and Adyen. Both with “ugly trends” at the time, allowing their stocks to be priced at decade-low valuation multiples. We don’t care about poor momentum if we can acquire truly great companies at what we think are great prices.
Their stocks are up roughly 20-25% each since these writeups, but that’s just luck. We didn’t understand the fall in the months prior to the writeups any more than we understand their subsequent rise now.
This makes us question the argument that markets become more efficient over time. We find it difficult to see why a greater share of passive capital, like illustrated earlier, should lead to more efficient pricing in the market.
Thus, we don’t see any rational reason yet why we should react to the index trend like Fundsmith does. Instead, we believe that if an increasing portion of market participants is passive, that should give better opportunities for those of us looking closer.
And, this is particularly relevant for smaller companies, especially those with concentrated ownership. Most indices weight companies based on free float market cap, so a company like MBB, with 74% of the company owned by insiders, would in an index be position-sized just a quarter of a similar sized company with a more traditional ownership structure.
Medistim is another example. We have heard Norwegian fund managers say that they would like to own the company, but that their stock is simply too illiquid. And these are managers running much smaller active funds, not the giant indexes.
In other words, we find the environment for being an individual stock picker not worsened by the strong performance of global indexes. Instead, we think increasingly passive flows in the market could make finding bargain easier, not harder.
As always, we could be wrong.
You can find write-ups for both companies mentioned below.
Topicus in India?
Arena Man Capital shared a Linkedin post about Topicus subsidiary TSS hiring in India. The extent that Topicus is expanding outside Europe have taken us by surprise.
It seems to us that the theory that Topicus would be Constellation’s entity in Europe is not entirely true, and reality show that both are looking for opportunities globally. Constellation have previously called out that different operating groups can fight for the same acquisition targets.
For Topicus, this strengthens our conviction that their reinvestment runway is long. Even in 2025, 44% of Topicus’ consolidated revenues was generated in the Netherlands. Given that most reinvestments occur inorganically outside the Netherlands, Topicus should be an increasingly global company over time.
And as we hinted at in the tweet above, who better to acquire and scale VMS’s valuable assets in the faster-growing emerging economies than the very company that has successfully done so in developed markets over the past few decades?
