The listeners have questions

Rob Armstrong (0:06)

Pushkin.

Katie Martin (0:09)

Happy New Year. We've had a blast doing these podcasts over the past year and a half or so. And one of the best things about it is we get nice emails from listeners. Mostly nice. Anyway, lately we've been asking you for your questions. What do you people want from us? Well, you delivered your questions, we got lots. And in today's show, pre-recorded before we head off to eat, drink and be merry, we're going to answer as many as we can to kick off 2025 This is Unhedged, the markets and finance podcast from the Financial Times and Pushkin. I'm Katie Martin, a markets columnist here at the FT in London, and I'm joined by the dynamic duo in New York from the Unhedged newsletter. First Sea Lord, Rob Armstrong and Able Deck hand, Aiden Reiter.

Rob Armstrong (0:55)

Yeah, man.

Aiden Reiter (0:56)

Ahoy.

Katie Martin (0:57)

Ahoy. Here we go. Chaps, happy new year.

Rob Armstrong (1:00)

Happy new year to you, Katie.

Aiden Reiter (1:01)

Happy new year.

Rob Armstrong (1:03)

It's going to be a great year, Katie.

Katie Martin (1:05)

It's going to be a biggie. Now, are you going out at New Year people or staying at home and getting drunk at New Year people?

Rob Armstrong (1:13)

I drink at home on New Year's, and I'm generally asleep before the ball drops, as we say here in New York City. I find the whole thing rather a bore.

Aiden Reiter (1:22)

I go out, but I get very cranky, very fast.

Rob Armstrong (1:24)

Yeah. I mean, it's so crowded. In New York City, it's like a mob scene and it's not fun. You basically got to barricade the door and stay home.

Katie Martin (1:31)

What a curmudgeonly pair you are. Now, we got loads of questions in our mailbag, and quite a few of them were about passive investing, which as you all know, if you've heard me talking about passive investing before, is a really good way of starting an argument with a markets person. So I guess a lot of these questions sort of settle around the idea of, is passive investment breaking markets? So we got a question, and I'm going to pronounce people's name wrong, and I'm sorry in advance.

Rob Armstrong (2:04)

It's all part of the service.

Katie Martin (2:05)

It's all part of the show, boys and girls. We got a question from Philip Fratchell, who asks, are investors missing opportunities outside of indices because of passive investment, and are companies prioritizing index inclusion over fundamentals?

Interesting. Rob, why don't you kick off for the uninitiative? What is passive investment?

Rob Armstrong (2:29)

So passive investing is investing through funds that own plus or minus the whole market, or a slice of market. So you might have a fund that owns the whole S&P 500 You might have a fund that owns every publicly traded stock in America. You might have a fund that owns just the small ones, or just the ones that are in industrials or healthcare or whatever. But it's a way to get exposure to the market or market segments without picking individual securities. And I would also say this is one of the great things in my view. I am strongly positive on passive investment. It is how I invest my own money. And it is low cost. And it captures the first thing that investors should want to capture, which is the general upward movement in equities over time. The beta in the market, the beta return. And so, yay for passive investing, says Armstrong.

Katie Martin (3:28)

Yay for passive investing. But Aiden, what kind of problems is this throwing up? Is there an argument, as our correspondent Philip asks, that they are penalizing companies outside of indices and actually investors are missing opportunities here?

Aiden Reiter (3:45)

I think there's definitely a very real rationale to his argument, right? So if you're just buying all the stocks in an index or buying all the companies in a sector, A, if you're having companies outside of that, as he said, then they're not getting included, they're not benefiting, and those could be the diamonds in the rough. That's ideally what active investors are going to try to find. But if the rest of the market's not paying attention to that individual company, that could either be a good thing for them, right? They buy it and then theoretically they have success, later get into the index and they owned it low, and then it went and skyrocketed when it was later included. Or again, they get tracked out of the money they otherwise would get. So I see it both ways. I think at the end of the day, though, it's probably a net good thing for people's retirement portfolios and probably the market at large to have people investing in broad sectors. So yes, there might be some losers, but for the most part, it's probably a good thing.