Latest / Merryn Talks Money / The Portfolio Reset: Episode 2

Transcript

The Portfolio Reset: Episode 2 · Merryn Talks Money

• 0:02
  Speaker 1: Bloomberg Audio Studios.
• 0:05
  Speaker 2: Podcasts.
• 0:06
  Speaker 3: Radio.
• 0:06
  Speaker 1: News.
• 0:08
  Speaker 4: We have SpaceX shares indicated to open 29% above the
• 0:12
  Speaker 4: IPO price of $ 135.
• 0:13
  Speaker 5: How big a deal is this SpaceX IPO?
• 0:16
  Speaker 2: I mean, the numbers are eye-popping.
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  Speaker 6: How big a deal?
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  Speaker 5: The biggest deal ever, literally.
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  Speaker 3: SpaceX had the largest ever IPO.
• 0:24
  Speaker 6: It's now one of the most valuable companies in the world.
• 0:27
  Speaker 1: Nearly $ 2 trillion. That was the valuation SpaceX carried onto
• 0:31
  Speaker 1: the stock market when it finally went public in June 2026.
• 0:35
  Speaker 1: Not a scrappy startup, not even a fast-growing billion-dollar company.
• 0:40
  Speaker 1: On its first day as a listed company, SpaceX was
• 0:44
  Speaker 1: already one of the most valuable businesses on the planet.
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  Speaker 7: And that's what made this listing so extraordinary. Because for
• 0:51
  Speaker 7: public market investors, this is the beginning. But for SpaceX
• 0:54
  Speaker 7: and all the private investors already, partly the company's journey,
• 0:57
  Speaker 7: an enormous amount of the growth had already happened.
• 1:01
  Speaker 1: So rewind more than 20 years, back to 2002 when
• 1:05
  Speaker 1: SpaceX was founded. Early investors were putting money into a
• 1:08
  Speaker 1: company that was still trying to prove it could reliably
• 1:11
  Speaker 1: get a rocket into orbit.
• 1:13
  Speaker 2: Any launch that goes well is significant, but this one
• 1:16
  Speaker 2: is sort of a big deal because it proves out
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  Speaker 2: this basic idea that rockets and spacecraft can be reused successfully.
• 1:23
  Speaker 7: Then came the breakthroughs. Rockets landed, astronauts went into orbit,
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  Speaker 7: Starlink satellites filled the sky, and as the technology was
• 1:30
  Speaker 7: being proven, the value of the company was climbing alongside it.
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  Speaker 4: The latest funding round by SpaceX values Elon Musk's company
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  Speaker 4: at about $ 74 billion. Investors put in $ 850 million led
• 1:40
  Speaker 4: by Sequoia Capital.
• 1:41
  Speaker 1: $ 74 billion there. Then hundreds of billions and eventually $ 2
• 1:46
  Speaker 1: trillion by the time SpaceX reached the public market.
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  Speaker 7: So you just need to think about the difference between
• 1:50
  Speaker 7: investors who got in along the way and the investors
• 1:53
  Speaker 7: who arrived at the IPO. So the founders, the employees,
• 1:57
  Speaker 7: the venture capitalists, the cleaners, other private investors, they all
• 2:00
  Speaker 7: own SpaceX. while it was making that journey from an
• 2:03
  Speaker 7: experimental rocket company to one of the biggest businesses in
• 2:07
  Speaker 7: the world and still an experimental rocket company. But by
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  Speaker 7: the time it was listed, much of that extraordinary increase
• 2:13
  Speaker 7: in value had already happened.
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  Speaker 1: We wanted to bring you to the floor of the NASDAQ,
• 2:18
  Speaker 1: where SpaceX executives are ringing in today's trading. They're celebrating
• 2:21
  Speaker 1: the launch of their highly anticipated historic IPO. Now that
• 2:25
  Speaker 1: bell marked the moment that SpaceX finally entered the public markets,
• 2:28
  Speaker 1: but it also marked something else important. A huge amount
• 2:32
  Speaker 1: of wealth created by one of the defining companies of
• 2:35
  Speaker 1: the past two decades being created before it even got there.
• 2:39
  Speaker 1: And that matters if your investment strategy is built around
• 2:42
  Speaker 1: one very simple idea. Buy the public market and let
• 2:45
  Speaker 1: capitalism do the rest.
• 2:48
  Speaker 7: Some of the most important companies of this generation have
• 2:51
  Speaker 7: been able to raise enormous amounts of money without going
• 2:54
  Speaker 7: anywhere near a stock exchange.
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  Speaker 6: We are now going to break records in 2026 for
• 2:59
  Speaker 6: IPOs and secondaries. And SpaceX, of course, is the granddaddy,
• 3:04
  Speaker 6: kicking it all off in a big way. But we're
• 3:06
  Speaker 6: going to see OpenAI and Anthropic and probably some others.
• 3:09
  Speaker 1: They are staying private for longer, and they are becoming
• 3:12
  Speaker 1: bigger while they're private. Welcome back to our special miniseries,
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  Speaker 1: The Portfolio Reset, getting your money to do more. I'm
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  Speaker 1: Meryn Somerset-Webb, editor-at-large for Bloomberg UK Money and author of
• 3:29
  Speaker 1: the weekly Meryn Talks Money newsletter.
• 3:32
  Speaker 7: And I'm John Stepik, senior reporter and author of the
• 3:34
  Speaker 7: Daily Moneyed Stilled newsletter.
• 3:37
  Speaker 1: And over three episodes, we are questioning some of the
• 3:39
  Speaker 1: assumptions underpinning markets today and how to think about what
• 3:43
  Speaker 1: that might mean for your own investment strategy. This is
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  Speaker 1: episode two. So if you haven't listened to episode one,
• 3:49
  Speaker 1: go back and do that first. In that episode, we
• 3:52
  Speaker 1: looked at how passive investing went from a genuinely revolutionary
• 3:55
  Speaker 1: idea to something approaching the default investment strategy.
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  Speaker 7: And we also explained how rising concentration in major indices,
• 4:03
  Speaker 7: particularly in the US, is making passive portfolios less diversified
• 4:08
  Speaker 7: and potentially more risky.
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  Speaker 1: In this episode, we're going to continue to look at
• 4:12
  Speaker 1: how the market around passive investing is changing and how
• 4:16
  Speaker 1: passive investing is in turn changing the market. We'll look
• 4:20
  Speaker 1: at how fund managers are now trading around passive flows
• 4:22
  Speaker 1: and how the rules that decide what's get into an
• 4:24
  Speaker 1: index can shape the way passive investing works. We explained
• 4:31
  Speaker 1: in the first episode of this series that for decades,
• 4:34
  Speaker 1: one of the great attractions of passive investing was very simple–
• 4:38
  Speaker 1: If you buy the market, you will profit from the
• 4:41
  Speaker 1: growth of the next generation of winners. But that logic
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  Speaker 1: doesn't apply anymore if more of that growth happens before
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  Speaker 1: those companies ever enter the market you are buying. Yeah, man.
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  Speaker 7: So 20 or 30 years ago, you could realistically say,
• 4:56
  Speaker 7: if you want exposure to capitalism overall, then just buy
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  Speaker 7: public markets. But today, it's not as clear that those
• 5:03
  Speaker 7: two things actually overlap quite as neatly.
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  Speaker 4: You see things like SpaceX going public at a $ 1. 8
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  Speaker 4: trillion valuation. Maybe it will grow rapidly into a $ 20
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  Speaker 4: trillion valuation in the next few years, and the people
• 5:15
  Speaker 4: who bought right after the IPO will do great. But
• 5:18
  Speaker 4: $ 1. 8 trillion is a lot of money, right? A lot
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  Speaker 4: of growth that has happened at SpaceX over a long
• 5:22
  Speaker 4: period of time has gone entirely to private investors.
• 5:26
  Speaker 1: That's Bloomberg columnist Matt Levine making a point that brings
• 5:28
  Speaker 1: us to a fairly obvious question, John. If I am
• 5:31
  Speaker 1: missing all this growth because I'm stuck in public markets,
• 5:35
  Speaker 1: why don't I just invest in private markets instead?
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  Speaker 7: Yeah, I mean, that sounds good. But unfortunately, it's not
• 5:41
  Speaker 7: quite that easy. I think there's a danger here that's
• 5:44
  Speaker 7: really worth kind of spending a bit of time on.
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  Speaker 7: So we all know now that private markets are increasingly
• 5:49
  Speaker 7: being sold to individual investors as the next great opportunity.
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  Speaker 7: And that includes things like governments being desperate to cram
• 5:56
  Speaker 7: them into your pension fund. There's an incredibly large difference
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  Speaker 7: between saying that some of the world's best investments have
• 6:03
  Speaker 7: been in private markets like SpaceX or whatever, and saying
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  Speaker 7: that private market investments that you can get hold of
• 6:10
  Speaker 7: right now are going to also be the world's best investments.
• 6:15
  Speaker 1: It's all about access, isn't it?
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  Speaker 5: Yep. The private equity space is dominated by large institutional
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  Speaker 5: players that have been backing the the most successful firms
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  Speaker 5: for decades, it's very difficult for private clients to get
• 6:29
  Speaker 5: that same type of return.
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  Speaker 1: That's Paul Kearney at Asset Risk Consultants. And there's a
• 6:33
  Speaker 1: particularly nasty statistical problem here as well, which is that
• 6:36
  Speaker 1: private equity returns are hugely dispersed. So the best managers
• 6:41
  Speaker 1: have absolutely extraordinary records, but the less good ones can
• 6:45
  Speaker 1: be less spectacular.
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  Speaker 7: Yeah, exactly. And so knowing that Yale or some other
• 6:49
  Speaker 7: giant famous pension fund has made fantastic returns from private equity,
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  Speaker 7: isn't terribly helpful if you can't invest in the funds
• 6:56
  Speaker 7: that they invest in.
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  Speaker 1: Exactly. And Bloomberg columnist Matt Levine makes a different but
• 7:02
  Speaker 1: rather related argument, which is to say that the private
• 7:05
  Speaker 1: equity sector in itself has now become absolutely enormous and
• 7:09
  Speaker 1: its sheer size in itself changes the returns that you
• 7:13
  Speaker 1: can potentially get from it.
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  Speaker 4: When private equity was 1% of listed equities, then you're
• 7:20
  Speaker 4: getting Kind of the lowest hanging fruit, right? You're getting,
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  Speaker 4: you know, buyout funds, buying the companies that are most
• 7:26
  Speaker 4: susceptible to being improved by the private equity playbook that
• 7:29
  Speaker 4: are most, you know, poorly managed or, you know, have
• 7:32
  Speaker 4: the poorest capital structure. And you can get huge returns
• 7:35
  Speaker 4: from private equity.
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  Speaker 1: So in other words, try and imagine private equity as
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  Speaker 1: a small group of super clever people hunting around for
• 7:43
  Speaker 1: badly run businesses that they can pick up cheaply, fix
• 7:46
  Speaker 1: and sell on. Also, imagine those people are really very
• 7:51
  Speaker 1: good at it. Now, if that's what's happening, there could
• 7:53
  Speaker 1: be enormous returns available. But then imagine suddenly that you've
• 7:58
  Speaker 1: got much, much more money piling into the same strategy.
• 8:01
  Speaker 1: And at the same time, maybe the managers aren't quite
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  Speaker 1: as super clever. And it doesn't work in the same way.
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  Speaker 4: When private equity is like a trillion dollars, it's like
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  Speaker 4: a competitor to an index fund. You're kind of buying
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  Speaker 4: every company and you're buying them in a slightly different
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  Speaker 4: way where private equity would argue you have better incentive
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  Speaker 4: structures for management. You have better capital structure. You should
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  Speaker 4: expect a higher return, but it's not clear that's true.
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  Speaker 4: And what you're not getting is the best companies or
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  Speaker 4: even the best buyout firms. You're getting sort of like
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  Speaker 4: a mass produced beta like product.
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  Speaker 1: Okay, so that's the first problem. Passive investing alone no
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  Speaker 1: longer gives you exposure to some of the best companies
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  Speaker 1: because those aren't even being listed anymore. And you can't
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  Speaker 1: fix that problem for yourself by investing in a random
• 8:44
  Speaker 1: private equity fund because that's not the same as it
• 8:47
  Speaker 1: was either.
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  Speaker 7: Let's start with an aspect change in the market that
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  Speaker 7: means passive is not always cracked up to be. And
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  Speaker 7: that is it's actually attracting too much of our money now.
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  Speaker 7: Is it becoming too dominant?
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  Speaker 1: When the idea of passive investing initially took shape, it
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  Speaker 1: was a tiny participant in a market dominated by people
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  Speaker 1: actively deciding what individual companies were worth and buying or
• 9:09
  Speaker 1: selling them on the back of that decision. But this
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  Speaker 1: is not the market that we have today.
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  Speaker 2: Jack Bogle himself always said that this will only work
• 9:20
  Speaker 2: when it's a small part of the market, because what
• 9:23
  Speaker 2: that market relies on are the collective decisions of Loads
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  Speaker 2: and loads and loads of different investors.
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  Speaker 1: That is Simon Evan Cook, fund manager at Downing Fund Managers.
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  Speaker 1: And his point is that passive investing needs active investors.
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  Speaker 7: Yeah, and that's absolutely right. Because for a tracker to work,
• 9:44
  Speaker 7: someone has to be doing the work of deciding what
• 9:47
  Speaker 7: the companies in the tracker are actually worth. And Simon's
• 9:51
  Speaker 7: argument is that this balance has now shifted and shifted
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  Speaker 7: too far in the wrong direction.
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  Speaker 2: Back in the 70s, just a tiny little piece of
• 10:00
  Speaker 2: the market that was aping what everyone else was doing.
• 10:03
  Speaker 2: Fast forward to today, the market is increasingly driven by
• 10:07
  Speaker 2: passive flows. So the question is, who's driving the bus?
• 10:12
  Speaker 1: What happens when passive goes from being a passenger in
• 10:14
  Speaker 1: the market to being one of the biggest vehicles in it,
• 10:17
  Speaker 1: possibly even the actual driver?
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  Speaker 7: Yeah, I think this is really worth unpacking because this
• 10:21
  Speaker 7: kind of gets to the heart of the problem. Because
• 10:23
  Speaker 7: if you think about what fundamentally investing is about, that
• 10:27
  Speaker 7: starts with the company. It starts with its profits, its debt,
• 10:31
  Speaker 7: its management, its prospects, whatever dividends it might pay. You
• 10:35
  Speaker 7: weigh all that up and you ask a simple question.
• 10:38
  Speaker 7: Given what I know, is this company worth buying at
• 10:41
  Speaker 7: today's price?
• 10:43
  Speaker 1: The key point is that a passive fund doesn't even
• 10:46
  Speaker 1: do it. Money comes in, investors buy the tracker, the
• 10:49
  Speaker 1: fund allocates it according to the rules of the index,
• 10:52
  Speaker 1: money goes out, and the fund then sells according to
• 10:54
  Speaker 1: those same rules.
• 10:56
  Speaker 3: Every single day, they receive inflows from investors in the
• 11:00
  Speaker 3: form of cash, and that cash needs to be reinvested
• 11:03
  Speaker 3: in the manner of the portfolio. That cash deployment creates
• 11:08
  Speaker 3: an additional flow. It also means that they are never
• 11:11
  Speaker 3: passive investors.
• 11:13
  Speaker 1: We spoke to Michael Green about this idea. He is
• 11:15
  Speaker 1: a former hedge fund manager who worked for Canyon Capital
• 11:18
  Speaker 1: and for tech billionaire Peter Thiel. He's been pretty vocal
• 11:22
  Speaker 1: about his belief that passive investing is in itself distorting markets.
• 11:27
  Speaker 1: So he frames passive funds as being like super simplistic
• 11:31
  Speaker 1: active funds, which I think is kind of a useful
• 11:33
  Speaker 1: way to understand why this might be affecting overall capital
• 11:37
  Speaker 1: allocation across markets.
• 11:39
  Speaker 3: They are always active investors because they are deploying capital continuously.
• 11:45
  Speaker 3: They're just active investors that operate off of the world's
• 11:47
  Speaker 3: simplest algorithm. Did you give me cash? If so, then buy.
• 11:51
  Speaker 3: Did you ask for cash? If so, then sell.
• 11:54
  Speaker 1: So here's the takeaway. Money comes into your ETF, your tracker,
• 11:57
  Speaker 1: whatever you buy. Money goes out of the same vehicle.
• 11:59
  Speaker 1: You sell.
• 12:00
  Speaker 7: That's the key point. So the ETF or the tracker
• 12:02
  Speaker 7: fund is just a wrap-up. The money goes into that
• 12:05
  Speaker 7: and it's then distributed to the stocks in the underlying index.
• 12:09
  Speaker 7: And so that is what affects the index itself. So
• 12:12
  Speaker 7: because of the way the money is directed, the biggest
• 12:15
  Speaker 7: stocks get even more money and then they get bigger
• 12:18
  Speaker 7: and then they get more money. And so it becomes
• 12:20
  Speaker 7: a kind of self-feeding cycle. And also when and if
• 12:24
  Speaker 7: people start to sell, for example, when they start to retire,
• 12:27
  Speaker 7: the same process will go into reverse.
• 12:30
  Speaker 6: Yeah.
• 12:30
  Speaker 1: So you buy, you buy the ETF, the manager of
• 12:32
  Speaker 1: the ETF goes out and buys the stocks. So money in, buy,
• 12:35
  Speaker 1: money out, sell. So Simon Evan Cook makes a very
• 12:38
  Speaker 1: similar point, just from a slightly different direction.
• 12:41
  Speaker 2: If you've got money coming into the market and it
• 12:43
  Speaker 2: is not particularly worried about what it's buying, it will
• 12:46
  Speaker 2: push up the price of the things that it's buying.
• 12:48
  Speaker 7: Now, regardless of whether these things are cheap and worth
• 12:51
  Speaker 7: buying or expensive and possibly overvalued, That.
• 12:55
  Speaker 1: Is exactly the concern. And that lack of interest from
• 12:58
  Speaker 1: an index into whether things are cheap or expensive, something
• 13:01
  Speaker 1: you wouldn't in the old days by the board or sold,
• 13:03
  Speaker 1: isn't relevant. And that potentially changes the game for everybody
• 13:07
  Speaker 1: else because the flows themselves can move prices, which means
• 13:10
  Speaker 1: investors have an incentive not to think about the fundamentals,
• 13:14
  Speaker 1: but just to predict where the money is going. So
• 13:18
  Speaker 1: don't think about what a company is worth, not relevant anymore.
• 13:21
  Speaker 1: Just think about where the money is flowing.
• 13:24
  Speaker 7: Yeah, and this is the other point that is actually
• 13:26
  Speaker 7: changing what even the active investors look for. So, for example,
• 13:30
  Speaker 7: there's now a huge business in trying to predict these
• 13:32
  Speaker 7: index driven flows. So Bloomberg recently reported. So in June,
• 13:36
  Speaker 7: there's a big hedge fund group called Millennium Management and
• 13:39
  Speaker 7: two teams there made about four billion between them, simply
• 13:43
  Speaker 7: trading around expected index changes. And that was more than
• 13:46
  Speaker 7: half of the firm's profits for the month. So it
• 13:48
  Speaker 7: is actually a lot of money. And the basic idea
• 13:50
  Speaker 7: is simple. You work out what stocks are likely to
• 13:53
  Speaker 7: be added to an index and you buy them before
• 13:55
  Speaker 7: the passive funds have to. And so you potentially benefit
• 13:58
  Speaker 7: when all that passive money follows. And you do the
• 14:00
  Speaker 7: reverse for the stocks that are likely to be removed
• 14:02
  Speaker 7: from the index. You short them before the index funds
• 14:05
  Speaker 7: are forced to sell. So you're not actually betting on
• 14:07
  Speaker 7: the prospects for the underlying company. You're betting on where
• 14:11
  Speaker 7: the passive money is going to move next.
• 14:14
  Speaker 1: Sounds mad when you look at it like that, doesn't it?
• 14:16
  Speaker 1: It also brings up a bigger philosophical question. So if
• 14:20
  Speaker 1: your investor is looking at balance sheets or talking to
• 14:23
  Speaker 1: management and making the decisions about where capital deserves, keyword deserves,
• 14:28
  Speaker 1: to go, then who actually performs that vital function?
• 14:33
  Speaker 7: Well, exactly. And as Simon Evan Cook puts it, none
• 14:36
  Speaker 7: of this is conducive to traditional quality-focused allocation of capital.
• 14:40
  Speaker 2: If you have suddenly got a problem where nobody in
• 14:44
  Speaker 2: the market is really particularly caring about what a balance
• 14:46
  Speaker 2: sheet looks like, what a company's debt level is, how
• 14:49
  Speaker 2: good the management are, then, yeah, that to me weakens
• 14:52
  Speaker 2: the case for capitalism, of which the stock market is,
• 14:55
  Speaker 2: you know, the central beating heart.
• 14:58
  Speaker 1: Capital allocation is no longer primarily driven by investing in
• 15:01
  Speaker 1: the best companies. It's driven by pumping ever more money
• 15:04
  Speaker 1: into the biggest companies. Now, John, remember how we started
• 15:19
  Speaker 1: this episode with SpaceX? And we did that because it's
• 15:21
  Speaker 1: a great example of a company that has had most
• 15:24
  Speaker 1: of its extraordinary growth in private before finally coming to
• 15:27
  Speaker 1: the public markets.
• 15:29
  Speaker 7: Which, as we explained, is a big problem for passive investors.
• 15:31
  Speaker 7: But we also chose to start the episode with SpaceX
• 15:34
  Speaker 7: because it illustrates some of the other challenges to passive
• 15:37
  Speaker 7: investing that we've been talking about. And that is once
• 15:40
  Speaker 7: a company like SpaceX does go public, What are the
• 15:43
  Speaker 7: index providers then supposed to do with it?
• 15:46
  Speaker 4: SpaceX is a quite large chunk of the investable universe
• 15:50
  Speaker 4: of US large cap stocks right now. And so if
• 15:52
  Speaker 4: you run a US large cap index, you might think, well,
• 15:54
  Speaker 4: we'd better have SpaceX in our index because it's a
• 15:57
  Speaker 4: large chunk of the investable universe. And if we don't
• 16:00
  Speaker 4: have it in our index, then we are not tracking
• 16:02
  Speaker 4: that universe for our investors.
• 16:04
  Speaker 1: That's Bloomberg columnist Matt Levine pointing out the first problem.
• 16:08
  Speaker 1: If SpaceX is big enough, leaving it out starts to
• 16:11
  Speaker 1: make the index look less like the market that it's
• 16:14
  Speaker 1: supposed to represent.
• 16:15
  Speaker 4: But overlaid on that, you have one historical index rules
• 16:18
  Speaker 4: that could be as simple as like, we will wait
• 16:20
  Speaker 4: a while after a company was public to include it
• 16:22
  Speaker 4: in the index, or it could be as complicated as
• 16:24
  Speaker 4: the S & P' s rule of we require sustained profitability
• 16:27
  Speaker 4: before we include it in the index. And so SpaceX
• 16:29
  Speaker 4: does not meet that requirement.
• 16:31
  Speaker 1: So the index providers can't simply say, it's huge, put
• 16:34
  Speaker 1: it in. They have rules and SpaceX might not fit
• 16:37
  Speaker 1: those rules.
• 16:38
  Speaker 4: And then also you have just people's very, very, very
• 16:40
  Speaker 4: strong views about valuation, right? And so you have SpaceX
• 16:45
  Speaker 4: going public at a giant valuation that's a hundred times revenue.
• 16:49
  Speaker 1: And this is where it becomes much more uncomfortable for
• 16:52
  Speaker 1: something that is supposed to be passive.
• 16:55
  Speaker 4: You have some people saying, if you don't put SpaceX
• 16:58
  Speaker 4: in the index, we will miss out on this incredibly
• 17:00
  Speaker 4: valuable company and that will be bad for index investors.
• 17:03
  Speaker 4: And you have other people saying, If you put SpaceX
• 17:05
  Speaker 4: in the index at this incredibly inflated valuation, it will
• 17:08
  Speaker 4: go down and that will be bad for index investors.
• 17:11
  Speaker 1: Either way, somebody has to make a judgment.
• 17:15
  Speaker 4: And so as an index manager, you have to make
• 17:18
  Speaker 4: decisions that are to some extent like philosophical about like
• 17:21
  Speaker 4: the meaning of your index and the value of your
• 17:22
  Speaker 4: rules and are to some extent valuation decisions.
• 17:25
  Speaker 1: And this gets right to the problem with the word
• 17:27
  Speaker 1: passive and the very thing that we've been trying to
• 17:29
  Speaker 1: get across so far in this series. There is no
• 17:32
  Speaker 1: entirely neutral answer. There's nothing you can do that is
• 17:35
  Speaker 1: genuinely passive. You include SpaceX, immediately you have made a decision.
• 17:39
  Speaker 1: You don't include it, you have made a decision. change
• 17:43
  Speaker 1: your rules so that you can include it, and you
• 17:46
  Speaker 1: have definitely made a decision and a very, very active
• 17:49
  Speaker 1: one at that. So as Matt points out, if you're
• 17:52
  Speaker 1: an index manager, you might not think of yourself as
• 17:55
  Speaker 1: a fund manager in the same way that active fund
• 17:57
  Speaker 1: managers have been thought historically, but that doesn't mean that
• 18:00
  Speaker 1: you're not going to have to make judgments. You're going
• 18:01
  Speaker 1: to have to make philosophical judgments. You're going to have
• 18:03
  Speaker 1: to make moral judgments and even valuation judgments about what
• 18:07
  Speaker 1: your index is supposed to represent.
• 18:09
  Speaker 7: Yes, so regardless of this word passive, somewhere along the chain,
• 18:13
  Speaker 7: somebody has.
• 18:14
  Speaker 1: To be active. Exactly, which brings us right back to
• 18:17
  Speaker 1: something that Paul Carney told us at the very beginning.
• 18:20
  Speaker 5: There was no such thing as passive investing because investing
• 18:25
  Speaker 5: means the creation of a portfolio which requires judgment.
• 18:28
  Speaker 7: Okay, so after all that, what am I actually meant
• 18:30
  Speaker 7: to do?
• 18:31
  Speaker 1: I don't know, John.
• 18:32
  Speaker 6: I don't know.
• 18:34
  Speaker 1: I'm not telling you to do anything. I would never,
• 18:36
  Speaker 1: ever do that. But what I am saying is that
• 18:39
  Speaker 1: no one should stop using passive funds.
• 18:42
  Speaker 7: Oh, good. That is a relief. I'm glad to hear that,
• 18:44
  Speaker 7: at least.
• 18:44
  Speaker 1: Yeah. But they're exactly as they always were. They're incredibly useful.
• 18:48
  Speaker 1: They're cheap. They're simple. And they can give you this wonderful,
• 18:50
  Speaker 1: broad exposure across the market. I mean, it's not as
• 18:53
  Speaker 1: broad as you once thought, but it still is pretty broad.
• 18:56
  Speaker 1: And what we are saying is that passive investing is
• 18:59
  Speaker 1: just a way of buying investments. It's a way of investing.
• 19:03
  Speaker 1: It's not actually an investment strategy in itself. And this,
• 19:07
  Speaker 1: I think, is where Paul makes the most useful distinction
• 19:09
  Speaker 1: of all.
• 19:11
  Speaker 5: Passive is the way you implement, not the way you
• 19:15
  Speaker 5: build a portfolio. That can only be about active judgments.
• 19:19
  Speaker 1: So in other words, yes, you can use passive funds
• 19:22
  Speaker 1: to build a portfolio. But in doing so, you are
• 19:24
  Speaker 1: not doing anything passive. You still have to build a portfolio.
• 19:28
  Speaker 1: You have to decide, yes, you, how much you want
• 19:31
  Speaker 1: in equities, how much in bonds, how much in gold,
• 19:33
  Speaker 1: how much in America, how much in technology, how much
• 19:36
  Speaker 1: in emerging markets. And whether the risks that you are
• 19:38
  Speaker 1: taking when you put that portfolio together actually matches with
• 19:42
  Speaker 1: what you want that money to do. When your end
• 19:44
  Speaker 1: goal is.
• 19:45
  Speaker 7: You know what? All of that sounds suspiciously like active investing.
• 19:49
  Speaker 4: Yeah.
• 19:50
  Speaker 1: We're going to give it a different name, John. We
• 19:52
  Speaker 1: are not going to call it active investing because that
• 19:54
  Speaker 1: would be rude to active investors. What we're going to
• 19:56
  Speaker 1: do is call it something else, something quite good, I think.
• 19:58
  Speaker 1: Active decision-making.
• 20:00
  Speaker 7: Active decision making. I like that. So this is the
• 20:03
  Speaker 7: most important lesson from this episode. You don't need to
• 20:05
  Speaker 7: become a stock picker. And quite frankly, you probably shouldn't
• 20:08
  Speaker 7: unless you've got a lot of time and you're really
• 20:10
  Speaker 7: good at it. You'll probably lose money. But you do
• 20:13
  Speaker 7: need to become the active manager of your own asset allocation.
• 20:16
  Speaker 7: You need to be an active decision maker. And that
• 20:20
  Speaker 7: starts not with asking what's going to go up next,
• 20:23
  Speaker 7: but with a much more boring question. What is this
• 20:26
  Speaker 7: money actually for?
• 20:28
  Speaker 1: Yeah, John, it's pretty boring. But it is very, very important.
• 20:31
  Speaker 1: If you are 25, for example, you are investing for
• 20:34
  Speaker 1: a retirement that is 40 years away, maybe, sorry to
• 20:37
  Speaker 1: be depressing, but maybe 50 years away at this point.
• 20:39
  Speaker 1: And that's another podcast altogether. So that's one portfolio. If
• 20:43
  Speaker 1: you're saving for a house deposit that you need in
• 20:45
  Speaker 1: three years, four years, five years at this point, please wait, everybody.
• 20:48
  Speaker 1: That is something completely different. So before you start looking
• 20:51
  Speaker 1: at these building blocks, you have to work out what
• 20:53
  Speaker 1: you're trying to achieve. Then you can start assembling your equities,
• 20:57
  Speaker 1: your bonds, cash, gold, different countries, different kind of companies.
• 21:00
  Speaker 1: And then you can start looking at different types of funds,
• 21:03
  Speaker 1: both passive and active, that may be a good way
• 21:06
  Speaker 1: of getting into those themes. So you've got to start
• 21:09
  Speaker 1: from the end goal and then you've got to work backwards.
• 21:13
  Speaker 1: So all this means we end up somewhere slightly uncomfortable,
• 21:16
  Speaker 1: somewhere where passive investing is absolutely not a bad idea.
• 21:20
  Speaker 1: But the phrase by the market doesn't mean quite what
• 21:23
  Speaker 1: it did. So passive is bigger than it was. And
• 21:26
  Speaker 1: that means that it has almost certainly, I think I
• 21:29
  Speaker 1: would actually go certainly, it has changed the way that
• 21:32
  Speaker 1: markets work at the same time. The market cap weighting
• 21:35
  Speaker 1: that we talked about earlier has left portfolios really concentrated
• 21:39
  Speaker 1: in the winners of the last decade and particularly in technology.
• 21:44
  Speaker 1: And at the same time, lots of the growth that
• 21:46
  Speaker 1: you might want exposure to, both in technology and other things,
• 21:49
  Speaker 1: by the way, is taking place outside public markets. So
• 21:53
  Speaker 1: even when you start deciding what passive index to own,
• 21:55
  Speaker 1: you've got to think about geography, about asset classes, about concentration,
• 21:59
  Speaker 1: about risk. And this isn't easy. There isn't an easy
• 22:02
  Speaker 1: way to do it.
• 22:03
  Speaker 7: Right, so we're definitely not saying abandon passive. What we're
• 22:05
  Speaker 7: asking you to do is don't confuse passive implementation with
• 22:10
  Speaker 7: passive thinking. Your portfolio still requires judgment regardless of how
• 22:15
  Speaker 7: hands-off you want it to be. And that is what's
• 22:17
  Speaker 7: going to take us on to episode three. We spent
• 22:20
  Speaker 7: two episodes telling you how we got here and what's changed.
• 22:24
  Speaker 7: But next time we're going to get into the really
• 22:25
  Speaker 7: fun bit.
• 22:28
  Speaker 1: We get practical. What does a portfolio reset actually look like?
• 22:32
  Speaker 1: And how do you work out how much risk you
• 22:34
  Speaker 1: should be taking? I think that's honestly what's keeping us down.
• 22:37
  Speaker 1: Lack of ability to take the risks that are meaningful
• 22:40
  Speaker 1: or important to us. Well, look at how you spread
• 22:42
  Speaker 1: that risk.
• 22:43
  Speaker 5: The answer probably always is to diversify across rather than
• 22:48
  Speaker 5: try and pick winners.
• 22:50
  Speaker 1: And we'll challenge some of the old rules about what
• 22:52
  Speaker 1: actually belongs in your portfolio. I don't think young people
• 22:55
  Speaker 1: need bonds. Dope.
• 22:58
  Speaker 6: What did you own?
• 22:59
  Speaker 1: How much did you own? And how do you put
• 23:00
  Speaker 1: it all together for the long term?
• 23:02
  Speaker 7: All coming next week. Really looking forward to it.
• 23:05
  Speaker 1: Yeah, me too. Thanks for listening to the second episode
• 23:13
  Speaker 1: in our three-part investment series. And a reminder, we will
• 23:16
  Speaker 1: have a final episode addressing listeners' questions. So please do
• 23:20
  Speaker 1: send them into our show email, merrimoneyatbloomberg.net. You can send
• 23:23
  Speaker 1: it in as an email or a voice note. We
• 23:25
  Speaker 1: may even play your question on the show. And as always,
• 23:29
  Speaker 1: if you like this episode, share it with a few
• 23:31
  Speaker 1: friends and leave us a review wherever you listen to
• 23:33
  Speaker 1: your podcasts. This episode was produced by Sam Asadi, Moses
• 23:36
  Speaker 1: Andam and Jennifer Seeley. Amy Keene is executive producer for
• 23:40
  Speaker 1: Talk Podcast and Cheryl Brumley is our head of podcast.
• 23:43
  Speaker 1: We will be back next week with more.