Multiple factors are driving structural changes across the investment ecosystem. The growth of passive investing, the historic concentration of market indices, the rise of systematic strategies, and the adoption of artificial intelligence have created a market that appears far more dependent on flows than on fundamental analysis. Trends reinforce themselves, volatility is amplified, and share prices can diverge from company fundamentals for extended periods of time.
One of the most significant developments in recent years has been the growth of passive investing. Billions of euros are allocated automatically into indices, without distinguishing between the companies that comprise them.
Adding to this phenomenon is an unprecedented concentration in many equity indices. This concentration, together with the growing weight of passive investing, creates a feedback loop, as a disproportionate share of capital ends up invested in the largest companies, causing their weight within indices to continue increasing.
As a result, fund flows are having an increasingly significant influence on short-term share price performance, creating opportunities and distortions that were less common in previous market environments.
The third major transformation is the growth of strategies with very short investment horizons. Quantitative funds, systematic strategies, algorithmic trading, leveraged funds, and other financial tools represent an increasingly relevant share of daily market activity. These strategies do not necessarily assess the intrinsic value of companies; instead, they react to variables such as momentum, volatility, liquidity, or price trends.
Finally, the adoption of artificial intelligence by market participants is introducing a new dynamic, reshaping the way investors process information and make decisions. AI-based tools make it possible to analyse corporate earnings, news, analyst conference calls, and estimate revisions almost instantaneously. More and more market participants react simultaneously and based on similar signals. As a consequence, the speed at which markets incorporate information has accelerated significantly.
In an environment where a growing portion of capital is allocated through ETFs, quantitative strategies, or thematic baskets, AI contributes to increasing correlations within the same sector. When a piece of news reinforces an investment theme, flows tend to move not only into a specific company but also into the entire group of companies perceived as beneficiaries of that trend. As a result, companies with very different business profiles may end up moving in a remarkably similar way.
At the same time, this dynamic increases dispersion between sectors. While a particular theme attracts attention and investment flows, other areas of the market may be temporarily overlooked. Price movements cease to be driven exclusively by the individual prospects of each company and become increasingly influenced by affiliation with a broader market narrative.
The combination of all these factors results in an amplification of market movements, both upward and downward. Periods of euphoria become more intense, and corrections more severe.
Markets Have Become Much More Speculative
Source: EDM Gestión SAU SGIIC
The Other Side of the Coin: Greater Opportunities
Many investors interpret this market transformation as evidence that fundamental analysis has lost relevance. In our view, the correct conclusion is precisely the opposite. The more the market is dominated by short-term dynamics, the more valuable a disciplined investment process focused on the intrinsic value of companies becomes. In today's market, there are greater significant divergences between price and value.
Paradoxically, the more efficient the market appears to be at processing short-term information thanks to artificial intelligence, the greater the likelihood that long-term inefficiencies will emerge. If the vast majority of investors react more quickly to the same information and build similar positions, the risk increases that certain companies or sectors become undervalued due to a lack of attention. And this remains one of the primary opportunities for fundamental investing.
As portfolio managers, our responsibility is neither to fight these trends nor to ignore them. We must understand them and adapt to them, while maintaining our focus on what has not changed: the value of businesses.
The economic value of a company still depends on the same factors: cash generation, return on capital, competitive advantages, reinvestment capacity, balance sheet strength, and sustainable growth. Investment flows may affect share prices for months or even years, but they do not alter the intrinsic value of a business.
Adapting to this changing market does not mean abandoning fundamental analysis. It means understanding the new reality and mitigating certain risks. Modern portfolio management requires acknowledging that these new factors influence volatility, sector correlations, and portfolio risk construction. Therefore, controlling sector concentration and appropriately sizing portfolio positions are more important today than ever before.
Discipline, patience, and conviction remain some of the most valuable competitive advantages for a fundamental investor.
All of these inefficiencies have been closely monitored and actively managed by EDM in recent years. Furthermore, the high concentration of investment flows has resulted in certain geographic regions, particularly Europe, and especially leading companies within their respective sectors, experiencing significantly less favourable stock market performance than their U.S. peers. In this context, the EDM International Strategy fund, managed by Beatriz López and José Francisco Ruiz, contains a substantial reserve of intrinsic value that we believe should gradually emerge as these market distortions and inefficiencies correct over time.
"Over recent years, we have navigated a market environment in which the rise of passive investing, together with the growing automation and standardisation of investment decisions, has encouraged a high concentration of capital and an accumulation of risks that, in our opinion, are not being fully appreciated by investors. Our portfolio managers at EDM have successfully identified the opportunities created by this situation, convinced that as fundamentals regain a central role in company valuations, that value will ultimately emerge," says José María Úbeda, our Head of Institutional Business for Spain and Europe. He adds: "We believe that active management will once again become predominant and, moreover, will emerge stronger thanks to the improvements in processes and information management made possible by AI."
The December 1999 cover of Barron's asked: "What's Wrong, Warren?" Just a few months later, it became clear that there was nothing wrong with Warren Buffett. What was distorted was the market.
Today is not 1999, and the causes are different. But when flows matter more than fundamentals, when concentration reaches extreme levels, and when investing becomes increasingly short-term oriented, it is worth remembering that cover. Not because history repeats itself exactly, but because investors often repeat the same mistakes. In a market increasingly focused on the short term, long-term thinking has become a scarce asset. And scarce assets tend to be good investments.
LEGAL DISCLAIMER
1) This information is provided for advertising and informational purposes only. It does not constitute, and should not be considered, investment advice or legal advice. It is not intended to replace the professional advice required in these matters and does not constitute an offer to sell or a solicitation of an offer to buy.
2) All opinions and estimates provided herein are based on sources considered reliable. However, EDM Gestión, SAU, SGIIC cannot guarantee their accuracy or completeness and assumes no responsibility for any direct or indirect loss arising from the use of the information contained in this document.
3) EDM Gestión, SAU, SGIIC warns that past performance is not a reliable indicator of future results.
4) EDM Gestión, SAU, SGIIC is a Spanish public limited company registered with the CNMV's Special Register of Collective Investment Scheme Management Companies under number 49 and with the Madrid Mercantile Registry under volume 36,739, folio 52, sheet M-658,326, tax identification number (CIF) A-58.217.175. Its activities include, among others, the representation, management and administration of Spanish-domiciled investment funds and investment companies, as well as discretionary portfolio management.
