“To the question, what shall we do to be saved in this world? There is no other answer but this: look to your moat.”
                                                                -        George Savile, 1st Marquess of Halifax 

“Perhaps the greatest flaw in the history of castles was thinking moats were a simple defensive tool. Not true! Moats can be both defensive and offensive weapons. In defense, they could be used to force the enemy to attack in a particular spot such as the castle’s most heavily defended area. But a moat might also allow the castle holder to hold one part of the line with fewer men while allowing a sortie (made larger by less defenders needed) on the besieging forces. A great moat allowed flexibility in defense and offense. Great leaders recognized this.”
 
                                                               -       Andrew Knighton  

Any modern value investor will inevitably use the concept of “competitive moats” in a conversation about a holding in their portfolio. From Graham to Buffett to Klarman, the concept has become a mainstay in the value investing lexicon. I think most value investors would describe a moat as a means of defending existing assets from the inevitable encroachment from competitors. Examples of this might include patents, pricing, or supply chains.
 
Moats May Be Used Both Defensively and Offensively
 
My time at Nintai Partners and now Nintai Investments LLC has taught me to think of moats somewhat differently. We see moats less as a Maginot Line, but rather a strong defensive position as well as a jumping off place for future growth. It seems to me that value investing requires a portfolio holding have both good value (derived from existing assets) and growth opportunities going forward (such as new markets). As examples, I believe a good moat must have strong defensive characteristics (a duopoly/monopoly, pricing advantages, or industry expertise). But it must also allow the company to keep growth perpetually moving forward. Growth strategies are driven by utilizing the defensive strength of the moat to create new opportunities in adjacent markets or new products. Confident in the defensive nature of its core industries, the company can utilize its product and services in industries similar to their core customers. As an example of this, Nintai looks for companies with high return on capital in both existing products and services as well as new initiatives.    
 
A Working Example: Veeva Systems
 
An example of a moat that works both defensively and offensively is Nintai Investments holding Veeva Systems (VEEV). Veeva Systems provides cloud-based software to customers in the life sciences industry for customer relationship, content, and data management. Veeva CRM is a suite of applications that help pharmaceutical and biotechnology companies market and sell products to healthcare providers. Veeva Vault, a product built on proprietary software, is a cloud-based application built to manage content and associated data. Veeva’s first-mover advantage has allowed them to dominate in life sciences with an estimated 65-70% market share.
 
By deeply embedding themselves in most aspects of life sciences drug discovery, development, and promotion/sales, the company has a deep competitive moat that can hold off competitors for at least the next decade or two. Utilizing a Salesforce customer relationship management (CRM) platform, Veeva has become the de facto CRM leader in life science sales and promotional teams. In addition, Veeva has created its own proprietary platform to assist life science companies work with data from drug discovery all the way to Phase IV (label expansion) trials. These products and services can be described as “defensive” in nature through their ability to hold and expend their life sciences customers.
 
Because the company’s systems are cloud based and agnostic to underlying systems, Veeva can use its moat to go on the offensive and seek out similar industries to life sciences (chemicals, food products, industrial manufacturing, etc.). Veeva Nitro – the company’s latest product launch – is a cloud-based data warehouse system that works with their CRM platform and analytics capabilities. These new offerings are meant to explicitly sortie outside their life sciences castle and move into such adjacent industries. As the company defensive moat continues to keep Veeva dominant in life sciences, it funds and creates opportunities to move out offensively in fronts which will drive growth over the next several decades.    
 
Veeva announced earlier this year it had been awarded contracts with two chemical companies and 1 industrial manufacturing facility. These new efforts are considered bridgeheads to the new industries targeted outside life sciences. Veeva’s goal is to create two new industry “castles” with deep competitive moats within the next 5 -10 years. By utilizing the same products and services (customized to meet the needs of these two new industries), Veeva believes it can leverage existing systems quite quickly into dominant positions.    
 
Deep Moats Can Prohibit Growth Too
 
A company with a deep moat can sometimes end being a value trap as management hunkers down and has no inclination to sortie out to seek new markets. An example of this is Value Line (VALU). I’m showing my age when I say I can remember spending days reading the Value Line reports on individual stocks and mutual funds. In its day, it was the Encyclopedia Britannica of investment research. With the onset of the digital age, the company made almost no effort to digitize its data or move to a web-based research model. This is a company Nintai would normally be salivating over. The company generates return on capital of 31%, return on equity of 36% and return on assets of 17%. The company has no debt and yields 3.6%. What’s not like?
 
 Unfortunately, the Bernhard family (Arnold Bernhard started the company in 1973. His daughter Jean Bernhard Buttner ran the company as well) through its family trust never saw any reason to take competition seriously from such companies as FactSet Research (FDS) or Morningstar (MORN). Hunkered down in their castle, company management saw revenue drop from $85.3M in 2004 to $35.9M in 2018. Even with a major restructuring in 2010, investors have seen a cumulative -4% return over the last 10 years (not including dividend reinvestment).
 
Value Line’s management has squandered an extraordinary asset in its Value Line reports by allowing a deep competitive moat to trap them within their own lines. Eventually, any moat can be filled. Without the ability to see outside the walls of their castle, sometimes the best companies play defense for far too long. Without any plan for growth, Value Line has become the walking embodiment of a value trap.
 
Conclusions
 
Without a doubt, I would rather invest in a company with a moat against one that has none. As a value investor though, that only tells half the story. A moat is only part of a fixed defense that allow for companies to continue building the moat or simply expand and build a new castle. Sitting in their fortifications, sometimes management can get overconfident and live off the safety of their moat for too long. Remaining in leadership means constant evolution in your business model so that as one moat may be filling, you might be thinking how to build an entirely new one. As the Marquess of Halifax said: look to your moat. But also look for growth.
 
As always I look forward to your thoughts and comments.    
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DISCLOSURE: I currently own Veeva in individual and institutional accounts. Morningstar (MORN) and FactSet Research (FDS) are former holdings of Nintai Partners.

“There is one thing of which I can assure you. If good performance of the fund is even a minor objective, any portfolio encompassing one hundred stocks (whether the manager is handling one thousand dollars or one billion dollars) is not being operated logically. The addition of the one hundredth stock simply can't reduce the potential variance in portfolio performance sufficiently to compensate for the negative effect its inclusion has on the overall portfolio expectation. Anyone owning such numbers of securities after presumably studying their investment merit (and I don't care how prestigious their labels) is following what I call the Noah School of Investing - two of everything. Such investors should be piloting arks. While Noah may have been acting in accord with certain time-tested biological principles, the investors have left the track regarding mathematical principles.”
 
                                                             -      Warren Buffett, 1965 Partnership Letter   

Anybody who has read Patrick O’Brian’s Aubrey and Maturin canon are quite familiar with concept of carrying too much sail. In the days before steam, all navies were dependent on the vagaries of the wind. Whether it be triple reefed topsails in a gale (meaning sails were made smaller through a series of “reefs”) or becalmed in the doldrums in the Sargasso Sea, ships’ schedules were dependent upon the amount of wind and the amount of sails the ship could carry. It was common for younger officers to over-press or over-canvass the ship. This meant that - counterintuitively - the ship could go faster if the masts carried less sail. Sometimes too much canvas could push the head of the ship downwards thereby creating more drag and slowing the ship down. Great sailors knew when less sails meant more speed. As the traditional saying goes, any damn fool can shake out a sail, but it takes a sailor to reef it.    
 
I bring this up not to simply mention the writings of Patrick O’Brian (though his works rank as some the best literature of the past century), but to point out the concept that less is more is as easily utilized in value investing as it is in an Atlantic gale in the Bay of Biscay. The idea of reducing the number of holdings in your portfolio goes against most major investment theses centered on risk. Many of these state that a greater number of holdings can reduce risk over time. In the next section, I will discuss why that overall negative view is well justified.
 
For now, I wanted to discuss why my firm takes a different approach than most of Wall Street. At Nintai Investments, we are quite aggressive in limiting the number of holdings in our personal and institutional portfolios. We achieve this by focusing on a very small segment of the total market. This segmentation can be made by any number of criteria: corporate strategy, financial strength, Nintai’s knowledge of the business market and competition, etc.[1] We run a very focused portfolio consisting of roughly 20 - 25 stocks. We do this for several reasons.
 
The Market is So Big, and My Mind is So Small
As of 2016, there are roughly 109,000 publicly traded stocks in all of the global markets (there are roughly 200 stock exchanges in the world). Nearly 4,000 of these are traded on a regular basis on the two major US exchanges – the New York Stock Exchange and the NASDAQ. Another 15,000 trade over-the-counter (or on the so-called pink sheets). That’s a lot of companies! To truly understand all the aspects of an investment (its strategy, operations, financials, markets, competitors, etc.) we’ve found we can own no more than 25 stocks and have a level of comfort that we completely understand each of our holdings.
 
My Business Knowledge is Wide….But Incredibly Shallow
To understand a company, an investor has to have considerable knowledge about their business and markets. Through my investing career I’ve found two areas where I’ve developed deep industry knowledge – health care and informatics. Most of the holdings in our portfolios will be in one of those two areas. You may have considerable knowledge about certain industries because of your line of work. Great returns can be made by investing in what you know about. Conversely bad returns can be generated by investing in something you know nothing about. As Thomas Watson Sr. (founder of IBM) said, “I'm no genius. I'm smart in spots — but I stay around those spots.”
 
My Criteria Rejects Roughly 99.99% of Publicly Traded Companies
I’ve discussed in great detail Nintai’s criteria for selecting portfolio holdings. It focuses on businesses with high returns, little/no debt, deep competitive moats, and trading at a reasonable discount to our intrinsic value. After running a screen with our investment criteria, we are left with roughly 140 - 180 publicly traded stocks around the world. It’s a pretty small pond! We believe the criteria create a portfolio with sound downside protection (owe very little money and are deeply embedded in client operations) as well as upside potential (platform-based with multiple new market opportunities).     
 
It Works For Us
A final reason (without trying to boast) is that it has worked - as configured by Nintai - for over 20 years. Our employees and investors have done quite well against the major indices. (remember: past returns are no assurance of future performance!)  
 
Is Less Really More?
 
As you read this article, you might think I’m now going to demonstrate that good, old-fashioned, intellectual sleeve rolling helps most focused portfolios generate better returns than the general markets. That would be a misplaced assumption. In fact, the exact opposite is true. Nintai is in a very distinct minority of focused portfolios that has outperformed the general markets over extended periods of time (see the previous warning that past performance is no assurance of great future returns!). As seen from the previous section, we’ve never run a focused portfolio because we think focus - by its very nature - outperforms the broader markets. Far from it. We run a focused portfolio out of necessity, not choice.
 
It turns out, running a focused portfolio - in general - isn’t an assurance you will outperform the markets. In fact, recent research by Morningstar demonstrates focused portfolios are no better (performance-wise) than broader index funds. However, they are more expensive by far. In Morningstar’s[2] “Portfolio Concentration Doesn't Have Much Sway on Returns”, Alex Bryan writes that their research finds there is no significant relationship between portfolio concentration and gross returns among U.S. equity mutual funds. The idea that allowing an investment manager to focus on his top picks will lead to market outperformance is really just all hogwash. This of course comes as a great surprise to focused investment managers (like me!), investment management companies that market such funds, and investors who put money in such funds.   
  
Performance is Similar to Non-Focused Portfolios
Focused portfolios (as measured by the percent of assets invested in the manger’s top 10 picks) had little effect on gross return when compared to non-focused funds within their respective Morningstar category. Accordingly, the odds of choosing a focused fund that will outperform the Morningstar category average return is very low. In Large (Growth, Core, and Value), Mid and Small-Cap, performance during 2004 - 2018 between the lest-focused quartile and the most-focused quartile was quite similar. In fact, in the total 9 domestic stock categories, only 2 saw the focused portfolios exceed the least focused by more than 1%. When fees are taken into account, most outperformance is washed out.   
 
Focused Funds Can Deliver Great Outperformance….and Great Under-Performance
As a portfolio becomes increasingly focused, the risk of wider swings in performance becomes much larger. For instance, a 100-stock portfolio had drawdowns of over 5% just once every 157 days from 2010 – 2017. A 20-stock portfolio had a similar drawdown every 34 days. Such swings happening at a far greater frequency can play old Harry on an investor’s nervous system. So remember: concentrated funds can deliver greater outperformance, but also greater underperformance. One other important reminder: since the majority of all funds never outperform the general markets, it stands to reason neither do focused funds.
 
Focused Funds are More Expensive
The average focused fund charged between 25 to 50 basis points more than a traditional non-focused fund. The largest difference was in small-caps - with focused funds charging roughly 39 basis points more. Large-caps had the smallest gap, with focused funds charging roughly 21 basis points more. Looking at performance, it’s not clear paying such a greater amount in management fees is worth it in the long run.   
 
Conclusions
 
Since founding the Nintai Partners Investment Fund in 2004, I have always run a relatively focused portfolio. Nintai Investments LLC continues that investment strategy. That said, as you look for investment managers it’s perfectly fine to invest with one who maintains a portfolio of 300 stocks versus one who focuses on only 25 individual positions. The key is understanding why the manager believes a focused approach works better and what their record has been in using such an approach. Sometimes spreading a little canvas can be just as effective as shortening sail. It simply depends on the sailor and the conditions.
 
DISCLOSURES: None, with the exception that I’ve read the Aubrey and Maturin canon (21 books) 8 times over.
 
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[1] For a far more detailed discussion on how we select holdings – and what criteria we use – please see my article “Our Investment Strategy and Portfolio Selection” which can be found here.
 

[2] “Portfolio Concentration Doesn't Have Much Sway on Returns”, Alex Bryan CFA, Director of Passive Strategies Research, North America, Morningstar Manager Research, May 1 2019

“I remember watching cartoons as a kid where each character had a super power. Some could fly, some could see through walls, some shot sticky crap to catch the bad guys. They all had something that innately made them better than both the bad guys and the good guys. When I’m looking at a potential investment, I want my managers to have capital allocation super powers. I want the Superman of return on capital”.
                                                                        -       Allard Ross 

“It’s interesting. I’ve never found a single test that can help you find a manager that - over the long-term - has the uncanny ability to be an outstanding allocator of capital. Perhaps the one and only corelative factor I’ve ever seen (and I mean this quite seriously) is whether the individual does their shopping at discount or second-hand stores. That nearly always guarantees you’ve got someone at the helm that takes shareholder capital very, very seriously.”    

                                                                     -      Pierre Pontet-Canet 

There was a story about Bob Kierlin, the former CEO of Fastenal (FAST) who used to buy his suits not a mark-down suit store, but suits already used by the manager at the mark-down suit store. He said, “Luckily, we're the same size. I picked up six of those suits for 60 bucks each." Another time, Bob and current CEO Dan Florness had to get to Chicago for a meeting. Since the meeting wasn’t until the next day, they decided to scrap the one-hour flight and drive instead – saving the company 78% in costs and eating at A&W because they had the cheapest hamburger on the route. But it wasn’t just frugality that Kierlin built into corporate DNA. Fairness was another. When a recession hurt Fastenal growth in 2001, management were the first to cut their pay. Variable pay for management declined 30%. Bob’s salary was hit the hardest. His $121,000 salary was cut almost in half to $63,500. For other employees, variable pay increased 4%.
 
Cheap Management Generate High Returns
 
In 2014, Nintai Partners did an analysis comparing corporate return on capital of companies with management compensation in the highest decile versus companies with management compensation in the lowest decile. We were interested in seeing whether there was a correlation between how much management was compensated and their respective company’s return on capital. We chose 36 companies from the top decile of the S&P 500 and 49 companies from the top decile of the Russell 3000 and calculated return on capital for the years 2009 - 2013. We chose the same amount for the lowest decile. In addition, we wanted to see if individuals who are compensated either dramatically more or less had a different tenure within their respective companies. Last, we were interested to see what happened to the company’s ROC after that management team had left. (The pool of candidates was smaller here simply because not everyone has left yet).
 
It turns out there was a strong correlation. The numbers seen below show that management who are compensated the least have a dramatic - and positive - impact on ROC. I should note this applied in every industry sector listed (in the Corporate Sector Make Up). The lowest 10% in compensation achieved an average ROC from 2009 – 2013 of 17.3%. The highest 10% compensated managers achieved a ROC of only 11.4%. Additionally, the lowest paid managers stayed on in their CEO position nearly 10 years longer. As an investor, not only does your holding managed by the lowest compensated managers generate a higher ROC, but it achieves it for a longer period of time. Last, the departure of the lowest paid CEOs had a slight greater negative impact than the departure of the highest paid (this is to be expected since the gap was so large to begin with). 
​

Why This Matters
 
Anecdotally, I’ve often heard that if someone manages your money like their own then you’ve found a good manager. It turns out the data show that managers who are frugally compensated have a tendency to generate much higher return on capital than those who are lavishly compensated. I believe Nintai’s research can teach investors several lessons.
 
Frugality is a Lifestyle
It turns out frugality runs through many managers’ personal and professional lives. Whether it be Bob Kierlin at Fastenal or Ken Iverson at Nucor (NUE), some individuals run a tight financial ship throughout their lives. This type of tight-fisted approach to spending can run through an entire business creating extraordinary internal returns (such as return on capital, return on equity, and return on assets) as well as investor returns.
 
Frugal Managers are Long-Lived Managers
During their research, Nintai Partners wasn’t able to measure the happiness or contentment of low-compensated versus high-compensated managers. But one thing was for certain - managers who faithfully showed up on the lowest compensated list year after year remained at their post far longer than those who were the highest compensated.   
 
Frugal DNA Remains Within the Organization
While return on capital decreased slightly after the departure of a lowest compensated manager, generally the company continued to outperform companies with the highest compensated managers. This persisted over the next 5 - 10 years in nearly every case. The values of the cheap-skate CEO had a lasting effect.
 
Conclusions
 
Over my investing career, I’ve always looked for companies with high return on capital because I believe these are organizations with the best chance at becoming (or already being) compounding machines. Partnering with managers whose personal and professional characteristics help drive high return on capital and receive low compensation can increase your chances in investing in one of these compounding machines. For instance - from 1987 to the 2019 - the S&P 500 has grown 989% while Fastenal’s stock has grown 49,000%. As an investor, you can’t ask for more than that. If you were Bob Kierlin, you simply didn’t.
  
DISCLOSURE: I own Fastenal in several accounts I personally manage. 

“Being an investment manager doesn’t require just our fiduciary stewardship of your assets invested with us. It also requires we provide you with the most relevant, timely, and useful information to understanding our methodology, purchases, sales, and performance. As an investment partner, we look to provide you with the same service we would look for if we were a customer. Partnership requires honest and fair dealing – with both the investment of your money and with information about your investments.”
                                    -   Nintai Investment “Statement of Investment Partnership”   

When one considers performance of active versus passive (index) investing, many times you will hear about how some markets are great for indexing - like the last 10-year bull market[1]. Of course, those arguing that bull markets are great for indexing and make it difficult for active investors to outperform are - wait for it - active investment managers. Indeed, the last 10 years (through 2018) have been cruel years for both value and growth investors[2]. For Large Cap (Growth, Blend, and Value) investors, only 9.6% of funds survived and beat their respective index. It was slightly better for Mid-Cap investors (18.2%), and for Small-Cap investors (19.5%). The disparity between the highest and lowest funds was shocking. For instance, in the Large-Cap category 15.7% of the least expensive funds beat their proxy while only 5.3% of the most expensive funds beat the same proxy. For Mid-Caps, 24.1% of the least expensive funds outperformed their proxy while only 10.2% of the most expensive compiled such a record. For Small-Caps, 23.9% of the cheapest funds outperformed versus 12.6% for the most expensive.

No matter how you slice it, those are difficult numbers to absorb as an investor looking to fund their retirement or child’s college education. It’s not difficult to see why the last decade has seen a massive influx into index funds. Yet, even with these numbers over half of total investments in the United States are still in actively managed funds (roughly 52% active versus 48% passive in 2019 according to Morningstar).     

It Isn’t Just Underperformance, But Also Under-Reporting

None of this information should be a great shock to investors (or fund managers), but sadly it is. As an active investment manager myself, I find not only outperformance is required to grow my asset base, but providing my investment partners with accurate, relevant data is essential as well. After considering this - along with the aforementioned performance data - I decided to investigate what type of information is provided to fund owners with a particular focus on the distinction between high- expense funds versus low-expense funds. After all, with such a larger group of high-expense funds underperforming, you would think they would have considerably more explaining to do.

I couldn’t have been more wrong. I divided quarterly reports into several major areas to see how each group does in terms of level of disclosure or discussion. These include investment strategy, portfolio holdings discussion, investment buy/sell criteria, and valuation of a holding at the time of purchase or sale. For the most expensive funds, a sample of 37 funds showed roughly 55% discussed their investment strategy while 45% did not. Roughly 35% did a cursory overview of portfolio holdings while 65% did not. Only 18% specifically discussed the business case for specific additions or sales to the portfolio. 82% made no mention. Finally, only 27% discussed valuations related to specific purchases or sales. The least expensive were considerably more forthcoming with data and discussions. A sample of 32 funds showed that 78% discussed their investment strategy. Nearly 60% discussed a percentage of their holdings (usually the top 10). A whopping 71% discussed specific purchases or sales (versus just 18%!). Only in the discussion of valuations related to purchase or sales were the two groups similar in percentage, with 34% of least-expensive funds discussing this subject.

So what should we make of this? Not only do funds with higher expenses underperform at an alarmingly higher rate than the least expensive funds, they also disclose far less in terms of portfolio specifics. Only in one area do high-expense funds out do low-expense funds – discussion of macro-economic issues. Presumably this is because they have less incentives to discuss performance and more to convince their investors why they are relevant.   
 
What Needs To Be Discussed

In my mind, the more information I share with my investment partners the better. That doesn’t mean every one of my investors reads everything I provide. But overall, I think it should be the investor’s decision - not mine - to decide what is too much and what is enough. Over time, I’ve found the following four items give my investors the best chance at fully understanding my investment strategy and decisions surrounding their portfolio holdings.

Explanation of Investment Philosophy
Whether it is Berkshire Hathaway’s “Owner’s Manual” or Nintai Investment’s “Statement of Investment Partnership”, every quarterly and annual report should include a summary of the investment manager’s methodology. Even better, examples of this including recent purchases and sales in the portfolio should leave investors with a clear understanding of what and how the manager is looking to achieve long-term outperformance versus their respective proxy. I include Nintai’s “Statement” at the beginning of each annual report and include an example of a portfolio holding’s purchase or sale with an explanation of its relevance to my core strategy.  

Investment Cases for New Investments
Each time I make a purchase or sale in any Nintai portfolio, I send each impacted investor (I may not necessarily purchase or sell a holding in all accounts) a detailed business case about the holding including a numbers-based summary (returns, free cash flow, debt, etc.), investment thesis, business overview, market characteristics, competitive analysis, business case risks, and valuation summary. In general this is 3-4 pages in length.  

Valuation Methodology and Estimated Intrinsic Value
I also send a summary valuation spreadsheet that includes a free cash flow valuation worksheet and multiple tabs that include return on capital calculations, balance sheet strength, allocation of capital, cash return, rate of return, etc. This gives the investor a chance to roll up their sleeves (if they so choose) and better understand why I think the price of the asset offers an adequate margin of safety and how I derived an estimated intrinsic value.   

Evaluation of Performance
The performance of Nintai Investment’s portfolio is front and center in each of my quarterly and annual reports. This includes both good and bad data (thankfully the good has far outweighed the bad, though past performance is no assurance of future returns!). I like to discuss those companies that added the most to returns and those that detracted the most. In the latter case, I find it helpful to outline how and where I got the investment case wrong and what steps can be taken to turn things around. This includes a frank discussion on what data points or results might require taking losses and moving on. I measure performance against both the S&P 500 TR (whch many see as a proxy for the market) as well as a individualized portfolio that best matches the portfolio but based on a collection of index funds and cash such as 15% Vanguard US Small Cap Index, 35% Vanguard Mid Cap Index, 35% Vanguard S&P 500 Index, and 15% Vanguard Short Term Government Bond Index.
Not every fund manager is going to be able to provide this to their investors. Funds with 1,200 holdings or 350% turnover are unlikely to be able to (or be financially capable of) providing such information on a quarterly basis. But when asked, they should be able to provide such data. It is their investors’ money after all for heaven’s sake.  

Conclusions

Active investment managers haven’t done a very good job of demonstrating an ability to outperform their respective index. They’ve done an even greater disservice to their investment partners at reporting and discussing as little as possible about their methodology, process - and most importantly - their performance. If we are - as a collection of investment professionals - going to change the trend of investors moving to passive investments versus active management, then we not only need to better our performance, but do a better job communicating with our investment partners. Underperformance requires more communication, not less. While it doesn’t make underperformance any easier to take for investors, they will at least better understand how and why such underperformance is taking place and how managers intend to turn things around. It’s the least active manages can do to allay the fears of a rightfully frustrated investor base.  

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[1] This is true in some ways but doesn’t tell the whole story. Many stock segments are performing quite poorly when compared to the S&P500 (the largest 500 companies publicly traded). For instance, Morningstar reports that nearly 25% of all publicly traded stocks are currently (as of April, 2019) trading in bear market territory. But overall, the last 10 years have been on average a tremendous bull market that has lifted the majority of all boats.  
[2] Data for this section comes from Morningstar’s Active/Passive Barometer. Information is from the 2018 report published in March 2018. The authors are Ben Johnson CFA and Alex Bryan.