A postcard from America Part 1 – A focus on markets

I spent last week with my colleague Sam around New York visiting companies to find out how they are feeling about the world and update our thoughts on their investment theses. Although we’ve seen businesses across different industries - both those in the portfolio and not - being New York, there has been a financial tilt to the companies. As well as their individual stories and associated investment cases, it has provided a timely update on the workings of the financial system. This week we are attending a conference that will see presentations from a broad range of largely US-listed businesses, and we’ll report back on that in the next investment view.

From the forthcoming mega-IPOsⁱ to the plumbing of payments and trading, market structures are evolving in a way that is shaping asset values themselves. This is something we have been writing about from the perspective of fundamental investors in the shares of companies that are trading on uncommonly cheap valuations at the current time. On the other hand, we also see that some equity valuations are high, as are overall market levels as a result. As a result of our conversations this week, we have some more insight into the forces driving this.

Providers of equity index data such as MSCI and Nasdaq are enjoying growth that is in part derived from an increasing volume of assets that are invested passively, tracking their index constituents. There is some $2.4tn invested in Exchange Traded Funds (ETFs) tracking MSCI indices, and half a trillion in Invesco’s Nasdaq tracking fund known as QQQ (or ‘the Qs’). The impact of such sums being invested with limited sensitivity to market prices seems likely to us to provide upward pressure on certain parts of the market. The drive toward ‘passivisation’ is certainly expected to continue apace by those that provide the benchmarks and infrastructure that enable it.

Not all capital that is invested along passive lines is in the big household name indices. MSCI construct some two hundred and sixty thousand indices (yes, thousand), allowing their clients to invest along highly thematic lines. We think we experience the impact of this at the micro level in the portfolio. Segments of the market today often move in almost perfect lock step, or perfectly out of phase with the market day to day, depending on the sector or theme they fall in. Thematic trading in bundles of stocks would in part explain this price action, with AI winners and losers an obvious one. Overall, indexation is not the only cause but is certainly part of the picture that is driving stretched valuations on both the high and low ends of the spectrum.

In sum, the index companies think passives will continue to grow, and the size and breadth of passives is huge. This drives some of the obvious trends in the market but also likely contributes to smaller things we are seeing like anomalous share price movements.

We see related trends in other areas of the capital markets. Away from equities, debt rating company Moody’s sees a growing pile of instruments to analyse, in part driven by the AI data centre construction boom. The sustainability or otherwise of this spending, and the related question of investors’ collective willingness to fund it, is the subject of some debate. What’s not in doubt is that the debt pile is growing. This growing pile, and the trading of it, is benefitting the debt market infrastructure business Tradeweb (part owned by portfolio company LSEG). Trading fixed income instruments is complex due to their non-standardised terms (different maturities, coupons and other structural terms), and the differing needs of the banks, dealers, traders and funds that participate in the market. Tradeweb’s electronic tools help their clients cope with this complexity, and whilst not quite the same as indexation/passive investing, they do add a programmatic element to trades in some parts of the market. On top, Tradeweb are experiencing growth in vehicles that track debt indices, much like their cousins in equities.

AI is of course a common topic of conversation. All providers of data, information and analysis are grappling with how to feed their information into these new machines such that it benefits their clients and their own top and bottom lines. A risk to market structure is that it potentially creates another avenue for price-insensitive investing, adding to the tendency toward extremes noted above.

Another risk is that AI disintermediates, displaces, or otherwise disrupts the ability of companies to generate profit from their information assets. It was interesting to hear about early delivery of information to AI models via Model Context Protocols (MCPs). The exact economics are still to be determined as it is possible that much more data is consumed in this new world, but the data providers are certainly not going to give it away for free.

There is also the potential for increased fraud rates due to the use of AI tools. We heard from Mastercard (a holding in the IFSL Evenlode Global Equity portfolio) about how they are deploying AI to improve the detection of potentially fraudulent transactions. If a transaction is flagged as fraudulent then the bank must step in, a highly manual and costly process. Therefore, it’s not just about identifying fraud, it’s also about reducing false positives. Mastercard’s new Decision Intelligence Plus service reduces false positives by 30% by utilising an AI model trained on its vast volumes of proprietary transaction data.

Returning to the tendency of markets toward extremes, I met with animal medicine maker Zoetis. A portfolio company since late last year, its stock fell significantly on its recent quarterly results which came in with revenues much lighter than expected, particularly in its US companion animal segment. Zoetis is normally a very steady business but there were some factors that combined in the quarter to drive sales lower; vets continuing to increase their prices to abnormally price-sensitive consumers, distributor inventories being sold down from already low levels, and aggressive price activity by competitors to drive trialling of new products (partly due to the strength of Zoetis’ position). The latter was expected but has stuck longer than expected due to heightened consumer price sensitivity, though is normalising to rational levels. Whilst not expected to necessarily right itself in the second quarter of the year, overall pet numbers, total spending on companion animals, and Zoetis’ clear market leadership position are supportive of returning to growth, while the company’s market multiple has never been more attractive.

Conversely in the portfolio, another new position this year is Qualcomm, a semiconductor company that has been caught up in a sudden lurch upward for chipmakers and semiconductor companies of different stripes. We invested in the company because it was cheap and has some interesting opportunities using its leading position in energy efficient chips for AI applications, in cars, and in general industry. We did not expect its share price to go up some 67% in the space of a monthⁱⁱ. Given the low price of the company’s stock when we initially bought it the valuation still looks ok, and we retain the position having taken some profits. However, given how dominant market momentum is at the current time it is possible that the valuation does continue to something more extreme and if it does then we will take appropriate action.

So generally, in the market we are seeing cheap things get cheaper, and more expensive companies move ever higher. However, the Qualcomm example shows that if Mr Market changes his mind things can change quite rapidly. If some of the trends in market structure we’ve been hearing about are contributing to this action then it is incumbent on us as active and fundamental investors to respond, to invest where valuations are being driven to unduly low levels. To state the obvious, in the long run the risk/reward balance from buying at lower prices should be better. Whilst not all companies will move as quickly as Qualcomm, we could see sentiment shift meaningfully if momentum starts to fade as a driving force in the market.

Ben Peters
28 May 2026

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