<\/p>\n
You can also listen to this podcast on iono.fm here.<\/p>\n
SIMON BROWN: I\u2019m chatting now with Luigi Marinus. He is head of discretionary fund management at PPS Investments. Luigi, appreciate the early morning time.<\/p>\n
In a recent piece you put out you talk around our being in a golden age of passive investing. A couple of years ago passive overtook active mutual funds in the US. The data shows active struggling to beat the index. But you also point out that this really has been helped by that golden age \u2013 low rates, practically no inflation, tons of liquidity in the market.<\/p>\n
That\u2019s not always the case. As things shift we might need to rethink some of our thinking around passive versus active.<\/p>\n
LUIGI MARINUS: Good morning Simon. Yes, that is 100% correct. We can\u2019t ignore that passive has done particularly well over the last while. And it\u2019s been coupled with, of course, passive being relatively cheap compared to active managers as well.<\/p>\n
Read:
Are investors overlooking a major shift in the global investment landscape?
\u2018Low cost\u2019 isn\u2019t the same as \u2018low risk\u2019: Rethinking passive investing<\/p>\n
I think the point that we want to make is just that things can change. So having a combination of passive and active is generally the way we would advocate for funds to be set up for solutions in the DFM [discretionary fund manager] case. So just be careful, because the expensive stocks are becoming more expensive, and at times eventually that does turn around.<\/p>\n
So the idea is maybe not just to be fully in passive, [but] have some diversified exposure across different asset classes as well.<\/p>\n
SIMON BROWN: I get you. I like that and I want to come back to what you just said there a moment ago, which is it\u2019s \u2018a blend of\u2019 \u2013 and we\u2019ll park that for now.<\/p>\n
But in the immediate the challenge with passive is that concentration. It has gone up. We know about the tech AI concentration. We forget about the local concentration \u2013 10 stocks half of the index.<\/p>\n
And then of course valuations. We love those valuations on the way up; we made money from it. But now that gets risky. This is now the risk to that passive, because nothing goes up forever.<\/p>\n
LUIGI MARINUS: Exactly, exactly. And the thing that drives passive the most is momentum of course. And momentum is almost defined by the most expensive and the largest stocks getting more expensive.<\/p>\n
That works well under certain market conditions, like you just mentioned now, and it has been the case over the last few years as well.<\/p>\n
What I want to say is more a different way of thinking about it in a way. If you think of, say, value investing versus growth investing \u2013 and people have been thinking about that for a long time \u2013 we know that value does well for a while, and eventually it turns around and grows as well for a while. It eventually turns around.<\/p>\n
Read:
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S&P 500 concentration risk
Why the next fintech unicorns may come from \u2018boring\u2019 ideas<\/p>\n
So that\u2019s how we would think about it from an active and passive perspective. The difference, though, with valuing growth is generally that active management costs are very similar, and now people are saying, well, the cheap part of the market is doing well, so why do we even have to worry about the other side of the market?<\/p>\n
But at the end of the day, at some point it\u2019s likely that we\u2019re going to see that turnaround, and that kind of normal cyclical way that markets do work. Our point is more to just be mindful of that and be careful. That that may happen at some point.<\/p>\n
SIMON BROWN: Absolutely. Gotcha. You make the point \u2013 it\u2019s a core beta exposure. Absolutely. And that\u2019s what it does.<\/p>\n
But at times \u2013 and this is perhaps one of those times \u2013 we need to sort of shift that exposure. I like your value versus growth analogy there. That active versus passive. It\u2019s not saying, let\u2019s move completely out, but let\u2019s shift some of that focus to the active because this is a different market from what we\u2019ve seen over the last decade.<\/p>\n
LUIGI MARINUS: Yes, we do think so. And the question globally around AI is: Is it a bubble or not? That\u2019s really difficult to predict. But what is likely is that there are going to be some winners and there are going to be some losers as well.<\/p>\n
And if you have an active manager that can maybe get some insight into what they believe to be the winners, and which ones they believe to be the losers, they might end up with a better outcome than a passive investment that\u2019s going to be invested across the board, regardless of whether they think it\u2019s going to do too well or not.<\/p>\n
Read:
Is it the end of easy gains for mega-caps?
Tech bubbles, AI, and emerging markets
AI bubble debate gets real as chip stocks rally turns historic<\/p>\n
So there is that value, I think, in the active managers that can use some discretion, especially when things are quite expensive and you\u2019re forced to buy those expensive counters. Kind of taking away a little bit from that could be quite helpful going forward.<\/p>\n
SIMON BROWN: Absolutely. And I\u2019m thinking \u2013 we\u2019ve touched on this, but it bears repeating \u2013 that in many senses passive chases the hot new thing. And SpaceX is a recent example.<\/p>\n
As an active investor, you might look at that valuation of SpaceX and think, whoa, don\u2019t know if I want it. As a passive investor you were buying it regardless.<\/p>\n
LUIGI MARINUS: Exactly, and that\u2019s by definition, and it has worked well for a number of years now, both locally and globally; probably even more so globally.<\/p>\n
Read:
The investors scrambling to keep SpaceX \u2013 and Elon Musk \u2013 out of their portfolios
Passive, active or both? How ETFs are becoming SA\u2019s most powerful long-term investment tool<\/p>\n
But we have seen, like you said, a lot of the hot counters getting even hotter, and that coupled with a lower fee as well. So you understand why investors are excited about it and saying this part of the market is definitely the way to go.<\/p>\n
But I think just some kind of rational thinking around it \u2013 and seeing what the risks are for that \u2013 is an important consideration.<\/p>\n
SIMON BROWN: Yes. And the hotter parts of the market are just getting hotter. I like that. That is the concern. That is the worry.<\/p>\n
We\u2019ll leave it there. Luigi Marinus, head of discretionary fund management at PPS Investments, appreciate the early morning.<\/p>\n
#Preferring #active #passive #current #environment<\/p>\n","protected":false},"excerpt":{"rendered":"
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