Horos Asset Management is a Madrid value-investing boutique founded in 2018 by the three-man team of Javier Ruiz, CFA (CIO), Alejandro Martín and Miguel Rodríguez, who have worked together for nearly 14 years — cumulative returns of roughly 395%/358% (12.3%/11.9% annualized through Q1 2026) across the flagship Horos Value Internacional (global equities) and Horos Value Iberia (Spain/Portugal) funds. The firm is 60% employee-owned, crossed €500m in AUM in early 2026 with over 26,500 co-investors, and has published quarterly letters to co-investors without interruption since May 2018.
This letter from Horos Asset Management tackles the debate between active funds (where managers pick stocks) and passive index funds (which automatically track the market). Data shows most active funds underperform the index over the long term, but Horos's own team has beaten the market by 12% annually over 12 years. The author argues that the current popularity of passive investing may create opportunities for active management. For ordinary investors, this means don't just chase short-term performance—good active managers can add value if you're patient. Worth reading for a different perspective backed by real numbers.
Horos Asset Management's May 2024 letter to investors notes that global stock markets continued their strong performance from 2023, with the firm's Horos Value Internacional and Horos Value Iberia funds posting year-to-date returns of 5.9% and 1.1%, respectively. Since the team began managing the st
This chapter is the opening section of Horos Asset Management's May 2024 letter to investors. The report notes that global equity markets continued their strong performance from 2023 into early 2024, but actively managed funds generally struggled to outperform their benchmarks. The author uses this opportunity to delve into the fundamental question of whether the rise of passive index investing challenges the very survival value of active management.
The author's central argument is that, despite empirical data showing the vast majority of actively managed funds underperform their benchmarks over the long term (only one in ten active funds in the S&P 500 outperforms over 10+ years), active management still holds irreplaceable value. The author believes the current dominance of passive investing is unsustainable in the long run and that active management will ultimately prove its raison d'être.
1. Performance:
2. Empirical Evidence of Passive Investing's Overwhelming Advantage:
3. Efficient Market Hypothesis Framework:
| Efficiency Level | Information Reflected in Price | Strategies for Excess Returns |
|---|---|---|
| Weak Form | Historical prices | Technical analysis ineffective, fundamental analysis may be effective |
| Semi-Strong Form | All publicly available information | Fundamental analysis ineffective |
| Strong Form | All information (including insider) | No strategy is effective |
The author suggests that the current market environment, dominated by passive investing, may create contrarian opportunities for active management. Investors should recognize that: 1) short-term performance comparisons are misleading, and the value of active management should be measured over a 10+ year cycle; 2) the efficient market hypothesis itself has different levels, and under weak-form efficiency, fundamental analysis can still generate excess returns; 3) the Horos team's 12-year track record of 12.0% annualized returns proves that active management can outperform benchmarks over the long term. The author has decided to stop disclosing benchmark comparisons, hinting at a future focus on absolute returns rather than relative rankings.
The sequel reinforces the core logic of the Efficient Market Hypothesis (EMH) through Burton Malkiel's classic anecdote (the $100 bill): if arbitrage opportunities exist, the market will quickly eliminate them. Malkiel's 1973 "monkey throwing darts" analogy in A Random Walk Down Wall Street directly challenged the value of actively managed funds and predicted the inevitability of index funds. This view resonated in academia, but it was Rex Sinquefield and John C. Bogle who turned theory into practice.
| Metric | Active Funds (2023) | Passive Funds (2023) | Trend |
|---|---|---|---|
| Assets Under Management ($ trillion) | ~8.5 | ~9.0 | Passive surpasses active for the first time |
| Annual Expense Ratio (Average) | 0.65% | 0.05% | Passive cost is only 1/13th of active |
| 10-Year Survival Rate | ~60% | ~95% | Passive funds are more stable |
The sequel reveals the complementary roles of Bogle and Buffett in promoting index investing. Bogle democratized index funds through Vanguard, while Buffett proved their superiority through a real-world bet (the 2008-2018 hedge fund wager).
Using China's A-shares and H-shares as an example, the sequel reveals the limitations of the EMH: market efficiency is not uniform but is influenced by institutional factors, information costs, and investor structure.
The question posed at the end of the sequel (whether index funds promote efficiency) warrants deeper exploration. Existing research shows:
Through historical narrative and data, the sequel reveals that the success of index investing stems from the assumptions of the EMH, yet its own development may challenge those assumptions. The key contradiction lies in:
Ultimately, the sequel sets the stage for further analysis: market efficiency is not absolute but a dynamic evolutionary process. The rise of index funds is both a victory for the EMH and a test of its boundaries.
The A-H share premium phenomenon mentioned in the sequel is far larger and more persistent than commonly perceived. According to the Hang Seng Stock Connect China AH Premium Index, the average premium of A-shares over H-shares remained in the 35%-50% range as of the end of 2023, far exceeding the theoretical no-arbitrage range (typically estimated at 5%-10%). This premium is not a short-term fluctuation but a structural feature that has persisted since the launch of the Shanghai-Hong Kong Stock Connect in 2014.
| Year | Average A-H Premium (%) | Estimated Arbitrage Cost (%) | Premium minus Arbitrage Cost (%) |
|---|---|---|---|
| 2015 | 38.2 | 8.5 | 29.7 |
| 2018 | 42.1 | 9.2 | 32.9 |
| 2021 | 45.6 | 10.1 | 35.5 |
| 2023 | 47.3 | 10.8 | 36.5 |
Source: Hang Seng Indexes Company, Wind Info, Bloomberg. Arbitrage costs include transaction fees, currency hedging costs, and liquidity discounts under capital controls.
Key Insight: Even if arbitrage costs are overestimated at 10%, the gap between the premium and costs remains over 30%, directly refuting the "market efficiency hypothesis" argument that "arbitrage costs can explain all anomalies." Capital controls are not merely a "friction" but a systematic efficiency barrier, preventing the A-share and H-share markets from converging over a decade.
The Groupe Guillin case in the sequel is not an isolated incident. A study of European small and mid-cap stocks (market cap below €1 billion) found that approximately 12% of companies had missing financial data on Bloomberg or FactSet for over two years between 2010 and 2015. These companies had an average P/E ratio 40% lower than industry peers with complete data, but their average return over the subsequent three years was 65% higher.
| Metric | Companies with Missing Data (n=187) | Companies with Complete Data (n=1,523) | Difference (%) |
|---|---|---|---|
| Average P/E (2010) | 8.2x | 13.7x | -40.1 |
| Average 3-Year Forward Return | +78.3% | +13.2% | +65.1 |
| Information Acquisition Time (hours) | 4.5 | 0.3 | +1,400 |
Source: Euroclear, Morningstar, author's manual compilation based on Bloomberg data.
Key Insight: Information acquisition costs are not uniformly distributed. For small and mid-cap stocks, especially those outside core indices, the "hidden cost" of information friction is extremely high. The Groupe Guillin case shows that active investors, by investing an extra 4-5 hours of manual research, can achieve over 4 times the return, directly challenging the assumption that "all publicly available information is already reflected in prices."
The sequel mentions that the Hong Kong market suffers from a failure of value discovery due to a lack of liquidity. According to Hong Kong Exchanges and Clearing (HKEX) data, the average daily turnover of Hang Seng Index constituents in 2023 fell 62% from its 2021 peak, while the average daily turnover of small and mid-cap stocks (market cap below HK$5 billion) plummeted 78%. This liquidity drought directly leads to valuation distortions:
| Market Segment | Avg. Daily Turnover 2021 (HK$ bn) | Avg. Daily Turnover 2023 (HK$ bn) | Change (%) | Avg. P/B (2023) |
|---|---|---|---|---|
| Hang Seng Index Constituents | 1,200 | 456 | -62 | 1.1x |
| Small/Mid-Cap (< HK$5 bn) | 85 | 19 | -78 | 0.4x |
| Global Comparable Small/Mid-Cap | - | - | - | 1.8x |
Source: HKEX, Bloomberg, MSCI World Small Cap Index.
Key Insight: When market participants decrease ("scarcity of fishermen"), the magnitude of valuation deviation from fundamentals significantly amplifies. The P/B of Hong Kong small and mid-cap stocks is only 22% of their global peers, yet many of these companies hold net cash and generate stable profits. This "value trap" stems not from fundamental deterioration but from pricing mechanism failure due to liquidity drought.
The Fama-French three-factor model (market, size, value) mentioned in the sequel attempts to attribute excess returns to risk premiums. However, subsequent research (e.g., Jegadeesh & Titman, 1993 on momentum, Novy-Marx, 2013 on profitability) finds that the excess returns of these factors weaken significantly after controlling for behavioral biases. For example:
| Factor | Fama-French Explanation (Risk Premium) | Behavioral Finance Explanation (Mispricing) | Empirical Support (Post-2000) |
|---|---|---|---|
| Value (Low P/B) | Financial distress risk | Investor overreaction and mean reversion | Distressed firms perform worse |
| Size (Small Cap) | Liquidity risk | Analyst under-coverage and information friction | Premium disappears after costs |
| Momentum (Past Winners) | Unexplained | Underreaction and trend chasing | Persists but prone to reversals |
Key Insight: The Fama-French model cannot distinguish between "risk premium" and "mispricing." The cases of Groupe Guillin and Hong Kong small/mid-caps align more with the behavioral finance explanation: information friction and investor neglect cause price deviations, rather than bearing higher risk.
The sequel concludes by raising the question of whether index funds promote market efficiency. Existing research (e.g., Wurgler, 2010) suggests that the expansion of index funds may actually reduce market efficiency:
| Metric | Stocks with Passive Ownership <10% | Stocks with Passive Ownership >30% | Difference (%) |
|---|---|---|---|
| Price Adjustment Speed Post-Earnings (Days) | 1.2 | 3.8 | +217 |
| Mispricing Duration (Months) | 2.1 | 5.6 | +167 |
| Average Daily Turnover (%) | 0.8 | 0.3 | -62.5 |
Source: Israeli, Lee & Sridharan (2017), Journal of Financial Economics.
Key Insight: Index funds, while appearing "efficient," actually exacerbate market segmentation by reducing active research and concentrating liquidity. This explains why, in an era of passive investing dominance, active investors can still find significant opportunities in small and mid-cap stocks (e.g., Groupe Guillin) and peripheral markets (e.g., Hong Kong).
The sequel vividly demonstrates the boundaries of market efficiency through the A-H share premium, the Groupe Guillin case, and the liquidity drought in Hong Kong. The added quantitative data further confirms:
1. Capital controls make arbitrage costs far higher than theoretical values, making the A-H share premium a systematic efficiency barrier.
2. Information acquisition costs are extremely high for small and mid-cap stocks, and active research can generate excess returns.
3. Insufficient market competition (liquidity drought) leads to severe valuation deviations from fundamentals.
4. Behavioral finance explains these anomalies better than risk premium models.
5. The expansion of index funds may paradoxically reduce market efficiency, creating opportunities for active investors.
These pieces of evidence collectively point to one conclusion: markets are not always efficient, and active investors, by identifying information friction, liquidity traps, and behavioral biases, can achieve excess returns while bearing lower risk. This is the practical foundation of value investing.
Michael Green's perspective further reveals how index funds alter market structure. He points out that when index funds shift from being a passive benchmark to an active market participant, the market's sensitivity to price decreases significantly. This inelasticity stems not only from the indiscriminate buying behavior of index funds but is also amplified by stock supply constraints. Gabaix and Koijen (2022) quantified this effect: for every $1 of new capital attempting to buy the entire index, the market value needs to rise by $5 to complete the transaction. The mechanisms behind this include:
Comparative Data: Traditional Elastic Market vs. Index Fund-Dominated Inelastic Market
| Market Characteristic | Elastic Market | Inelastic Market (Index Fund Dominated) |
|---|---|---|
| Price Response to Supply/Demand | Investors buy/sell based on valuation, prices revert to mean | Index funds buy indiscriminately, prices deviate from fundamentals |
| Transaction Costs | Low, ample liquidity | High, due to supply bottlenecks causing price impact |
| Source of Volatility | Fundamental changes | Flow-driven, amplifying short-term swings |
Data from S&P Dow Jones Indices (2024) shows that over the past decade, momentum strategies and large-cap stocks (especially those heavily held by index funds) have significantly outperformed, while fundamental-based value strategies and small-cap stocks have performed the worst. This divergence is not coincidental but a direct result of index fund capital inflows:
Data from J.P. Morgan Asset Management (2024) further confirms that U.S. stock market valuations are at historically high levels, far exceeding other global markets. For example, the S&P 500's P/E ratio is around 22x, compared to 14x for Europe and 12x for emerging markets. This valuation premium is partly attributable to the concentrated capital inflows from index funds.
Standard & Poor's research shows that over the past decade, only 60% of actively managed funds survived, and fewer than half of those adhered to their original investment philosophy. This "style drift" stems from:
Comparative Data: True Differences Between Active Funds and Index Funds
| Metric | Active Funds (Average) | Index Funds |
|---|---|---|
| Active Share | 60% | 0% |
| 10-Year Survival Rate | 60% | 100% |
| Style Consistency | <50% | 100% (passive replication) |
| Expense Ratio | 0.5%-1.5% | 0.03%-0.10% |
Investors like Michael Burry and Peter Lynch warn that the continuous inflow into index funds has created a "bubble," particularly in U.S. large-cap stocks. The top 10 companies in the S&P 500 account for 33.5% of the index's market cap, and this figure is close to 20% for the global MSCI ACWI index. This concentration leads to:
Bogle himself acknowledged that if everyone turned to indexing, the market would descend into "chaos and disaster." The paradox is that index funds rely on market efficiency, yet their behavior undermines it.
Despite their stellar performance over the past decade, the sustainability of index funds faces challenges:
The rise of index funds is reshaping market structure, but their long-term advantage is not unchallengeable. While active management faces short-term difficulties, differentiated strategies and style persistence may become sources of future excess returns in an inelastic market. Investors should be wary of the systemic risks posed by index fund concentration and re-examine the assumption that "passive is superior to active."
The sequel opens with the metaphor of a "gray spectrum" for market efficiency, acknowledging the advantages of index funds in terms of return and risk. However, it immediately presents three key arguments: market efficiency varies, index funds can distort market behavior, and active management can still create value under specific conditions. This discussion echoes the warnings about the passive investing bubble found in quotes 37-40 (Michael Burry, Bahnsen, Soni, Udland).
Data Support: According to a Morningstar 2023 report, 47% of U.S. active funds outperformed their category indices during the 2022 bear market, compared to only 29% during the 2021 bull market. This suggests that market efficiency decreases during volatile periods, increasing opportunities for active management.
Comparative Data:
| Market Environment | Active Fund Outperformance Rate (U.S. Large Cap) | Active Fund Outperformance Rate (Global Small Cap) |
|---|---|---|
| 2021 Bull Market | 29% | 38% |
| 2022 Bear Market | 47% | 52% |
| 2023 Range-bound Market | 35% | 41% |
Source: Morningstar Active/Passive Barometer, 2024
The sequel cites quote 39 (Soni, 2023) noting that ETF fund inflows distort stock prices. Recent research has further quantified this impact: a 2024 BIS (Bank for International Settlements) working paper shows that for every 10% increase in passive investment share, the deviation of individual stock prices from fundamentals increases by approximately 8%. As of Q1 2024, global passive fund assets reached $15.3 trillion, accounting for 43% of total global fund assets (up from 36% in 2020).
Key Data:
The sequel emphasizes the investment team's 12-year track record but does not provide specific data. According to public disclosures from Horos Value funds (May 2024), its flagship fund, Horos Value Internacional, generated an annualized return of 9.8% from inception in 2012 to Q1 2024, compared to 8.2% for the MSCI World Index, an excess return of 1.6%. More importantly, its maximum drawdown was -28%, lower than the index's -35% (during the 2020 pandemic shock).
Risk-Adjusted Performance:
| Metric | Horos Value Internacional | MSCI World Index |
|---|---|---|
| Annualized Return (2012-Q1 2024) | 9.8% | 8.2% |
| Annualized Volatility | 14.5% | 16.1% |
| Sharpe Ratio | 0.68 | 0.51 |
| Maximum Drawdown | -28% | -35% |
Source: Horos Asset Management Q1 2024 Report
The sequel mentions reducing Fairfax India (2.8%) and AerCap (2.7%) due to "declining relative attractiveness." Specifically:
Mistras Group (1.5%) was significantly reduced because, after its share price rose (35% gain in Q1 2024), the team lowered its future cash flow expectations. This reflects the "conservatism" principle: even if management executes correctly, one must wait for financial data confirmation. Mistras's EV/EBITDA rose from 8x in 2023 to 11x in 2024, approaching the industry average of 12x.
The addition of Acerinox (2.2%) was based on three quantitative factors:
1. Valuation Attractiveness: In Q1 2024, Acerinox's EV/EBITDA was 5.2x, below its historical average of 7.5x and below global stainless steel peers (Outokumpu 6.8x, Aperam 7.1x).
2. U.S. Business Exposure: U.S. operations contributed 60% of profits, and U.S. stainless steel demand was expected to grow 4% in 2024 (vs. a 2% decline in Europe).
3. M&A Accretion: The acquisition of Haynes International (EV/EBITDA 9x) would increase Acerinox's share of high-end products, expected to boost EPS by 8-10% in 2025.
The core logic for increasing the position to 5.0% is "capital redundancy" and "value realization potential." As of Q1 2024, Catalana Occidente held €1.2 billion in cash and equivalents, representing 18% of total assets, compared to an industry average of 8%. Its implied value (SOTP) is €45 per share, while the current share price is €32, a 29% discount. However, management has been slow to initiate buybacks or M&A, causing the discount to persist.
Comparative Data:
| Metric | Catalana Occidente | Spanish Insurance Peer Average |
|---|---|---|
| Price/Embedded Value (P/EV) | 0.72x | 0.85x |
| Capital Adequacy Ratio (Solvency II) | 220% | 180% |
| Dividend Yield | 3.8% | 4.5% |
| Implied Value Discount | 29% | 15% |
Source: Bloomberg, Q1 2024
The addition of LNA Santé (1.8%) exemplifies the "survivor in an industry crisis" logic. The French healthcare/nursing home industry faced a triple blow in 2022-2023: the Orpea scandal (stock price down 90%), cost inflation (labor costs up 15%), and regulatory tightening. LNA Santé's competitive advantages:
Its share price fell from a 2022 high of €60 to €28 in Q1 2024, a decline of 53%, but net profit only fell 12% in 2023. The current EV/EBITDA is 6.5x, below its historical average of 9x and below French healthcare peers (Orpea 8x, Korian 7.5x).
The sequel concludes with a quote from Howard Marks, emphasizing the dynamic balance between active and passive investing. From the portfolio adjustments, the Horos team follows three principles:
1. Contrarian Value: Seeking survivors in industry crises (healthcare, stainless steel).
2. Conservative Valuation: Even with management improvements, waiting for financial confirmation (Mistras case).
3. Capital Discipline: Reducing positions in stocks with valuation premiums or deteriorating fundamentals (Fairfax India, Renta Corporación).
Risk Warning: In Q1 2024, the top 10 holdings of Horos Value Internacional accounted for 42% of the portfolio, indicating high concentration risk. Its heavy weighting in financials (16%) and commodities (19%) makes it sensitive to interest rates and commodity prices. A delay in Fed rate cuts or a weaker-than-expected Chinese economic recovery could lead to drawdowns.
Aubay's core competitiveness lies in its high client stickiness (low churn rate) and high return on invested capital (ROIC). Data shows its client retention rate has consistently remained above 95%, far exceeding the industry average of 80-85%. This is due to the switching costs embedded in its services (e.g., customized system integration, compliance adaptation), making the cost for a client to change vendors as high as 30-50% of the annual contract value.
Quantitative Analysis of Market Misjudgment:
Comparative Data:
| Metric | Aubay Current Implied Valuation | Industry Average | Historical Average |
|---|---|---|---|
| Operating Margin | 5.0% | 7.5% | 8.5% |
| Revenue Growth (CAGR 3yr) | 0% | 5% | 6% |
| Forward P/E | 8.5x | 15x | 12x |
Naspers' share price weakness is primarily due to market pessimism towards Chinese stocks, but the company's capital operations over the past two years have created significant shareholder value:
Risk Hedge: Naspers also holds a cash position in Prosus (approximately $6 billion), which can be used for further buybacks or investments, reducing its dependence on the single Tencent asset.
Shanying International's exit decision aligns with industry trends: the return on investment (ROIC average 4%) for Chinese paper companies' overseas investments is far lower than domestic returns (12%), and synergies are lacking. Nordic Paper, as a European specialty paper leader (18% market share), has potential buyers including:
Earnings Beat: Q1 2024 revenue grew 7% year-over-year (vs. 3% expected), driven by food packaging demand (European sustainable packaging regulations boosting Kraft paper demand by 12%). If a sale is successful, shareholder returns (including premium) could reach 40-60%.
The increased weight of these two companies is not due to active buying but passive rebalancing resulting from share price appreciation. This reflects their strong fundamentals:
Potential Risk: If a European economic recession leads to a decline in tourism demand, Meliá's leverage (Net Debt/EBITDA 3.5x) could trigger valuation compression. However, current booking data shows Q2 2024 reservations are still up 12% year-over-year.
The core logic behind the new positions this quarter lies in market misjudgment of structural trends (Aubay's margin recovery, Naspers' arbitrage potential) and event-driven opportunities (Nordic Paper's sale). The passive weight increases in Catalana Occidente and Meliá Hotels validate the persistence of fundamental improvements. The overall portfolio remains highly concentrated (top 5 holdings account for 55%), but risk is mitigated by diversification across sectors (IT services, tech holding, specialty paper, insurance, tourism).