Key Takeaways
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Leadership changes are a normal and healthy part of market cycles — don’t assume today’s winners will lead forever.
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Price-conscious investing historically performs best at inflection points like the one we may be approaching now.
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True diversification requires going beyond market-cap-weighted indexes and owning businesses that are priced for attractive forward returns.
Passive investing has had a remarkable run over the past decade. Flows into index funds and ETFs have been relentless, reinforcing the dominance of U.S. large-cap growth stocks. This trend has created what some have described as a “bear market in diversification” — a period when almost every attempt to invest differently from the benchmark has been punished.
But 2025 has shown the first real signs that this dynamic may be shifting. During the first half of the year, U.S. large-cap stocks underperformed international equities, and the U.S. dollar saw its sharpest first-half depreciation in nearly 50 years. For investors who have been waiting for a reason to diversify, this could mark the beginning of a new market regime.
The challenge is that traditional index-based diversification may no longer be enough. Most global benchmarks remain heavily concentrated in U.S. mega-caps — meaning you’re still making the same big bet, just with a different label. To truly diversify, investors may need to look for strategies that are actively managed, price-conscious, and willing to own businesses outside the market’s current favorites.
At Third Avenue, we believe this is exactly the type of environment in which active, fundamental investing can shine. Our approach is rooted in disciplined research and valuation — buying businesses that we believe are attractively priced relative to their long-term prospects. These companies are often out of favor today, which is exactly why they offer potential for both strong returns and reduced correlation with the market’s most expensive names.
This is not about timing the market — it’s about recognizing that the forces that created today’s concentration risk may be fading and preparing portfolios for what comes next. Market leadership doesn’t last forever. When it shifts, it often does so quickly, leaving passive investors exposed to prolonged periods of underperformance.
This “bear market in diversification” may have discouraged many investors from staying active, but we believe that now is the moment to reconsider. Allocating to active strategies can help restore balance to portfolios, potentially reduce risk, and position investors to benefit when market leadership inevitably broadens or shifts.
For investors willing to be patient, these periods of extreme concentration often provide the best opportunity to buy high-quality assets at attractive prices. And when the cycle turns, those who stayed disciplined are often rewarded.
IMPORTANT INFORMATION
This publication does not constitute an offer or solicitation of any transaction in any securities. Any recommendation contained herein may not be suitable for all investors. Information contained in this publication has been obtained from sources we believe to be reliable, but cannot be guaranteed.
The information in this article represents the opinions of the portfolio manager(s) and is not intended to be a forecast of future events, a guarantee of future results or investment advice. Views expressed are those of the portfolio manager(s) and may differ from those of other portfolio managers or of the firm as a whole. Certain information contained in this letter constitutes “forward-looking statements,” which can be identified by the use of forward-looking terminology such as “may,” “will,” “should,” “expect,” “anticipate,” “project,” “estimate,” “intend,” “continue” or “believe,” or the negatives thereof (such as “may not,” “should not,” “are not expected to,” etc.) or other variations thereon or comparable terminology. Due to various
risks and uncertainties, actual events or results or the actual performance of any fund investment may differ materially from those reflected or contemplated in any such forward- looking statement.
Based on portfolio manager commentary first used on July 16, 2025
Distributor of Third Avenue Funds: Foreside Fund Services, LLC.