All-weather investing

Seeking good positive returns.

Come rain or shine.

Ruffer provides investment management services for institutions, pension funds, charities, financial planners and individual investors.
Ruffer LLP
Select Location
UK
Europe
Australia
US
Asia
Middle East
Channel Islands
Rest of world
Type of Investor
Individual investors
Institutional
Charity
Family office
Financial planner
Individual investors
Institutional
Charity
Wholesale
Institutional
Institutional
Institutional
All investors
All investors
London
80 Victoria Street
London SW1E 5JL
Edinburgh
31 Charlotte Square
Edinburgh EH2 4ET
Paris
103 boulevard Haussmann
75008 Paris, France

The rise and rise of passive investing

There are more passively managed assets than actively managed – what could this mean?
The Green Line
Duncan_Macinnes
Duncan MacInnes
Investment Director

Soon, for the first time ever, there will be more money managed passively than actively in the US. The rest of the world is not far behind.

A cynic might describe passive investing as ‘unthinking’, while adherents might prefer ‘rules-based’ or ‘low-cost’. Regardless, we are crossing a Rubicon. We will politely ignore the irony that every passive investment begins with an active decision as to which index or asset class one would like to passively mimic.

The primary assumption of passive investing is that markets efficiently assimilate all relevant information instantaneously and reflect it in share prices. Effectively, the wisdom of crowds ensures it is near impossible to consistently beat the market, particularly after frictional costs and fees.

What often goes unsaid is that passive investors piggyback off active investors. Their success relies upon active investors constantly assessing and re-pricing risks, with the cumulative ‘best guess’ of all participants accurately and quickly reflected in prices. Active investors’ efforts to capture mispricing are the reason why markets are efficient.

If active investors cease to be rewarded for their efforts by excess returns or management fees then who ensures prices and fundamentals do not diverge? Is there a limit as to how large passives can be before markets become inefficient?

Furthermore, most indices are market capitalisation weighted, giving larger companies chunkier benchmark weightings. This has many consequences: passive funds can be surprisingly concentrated around big stocks, and passive investors may find themselves focused in the fully grown, most mature companies.

Most perversely the passive investor is by definition forced to buy the mania – the more overvalued a company, the larger it will be as a proportion of the index.

A stark example of passive investing leading lambs to the slaughter was UK banks exceeding 20% of the index just before the financial crisis. At Ruffer we eschew benchmarks, and this afforded us the flexibility to own no UK banks in the lead up to the crisis, thereby saving our investors from significant losses. Today, it is technology stocks (eg Google and Amazon) which dominate the S&P, and once again we are happy to avoid them.

Damned if they do… damned if they don’t
June 2018: Wage inflation in the US poses a growing problem for the Fed
Read
Quantitative tightening – what might it mean?
May 2018: Shrinking central bank balance sheets could undermine record asset prices
Read
Why traditional safe havens might not work
April 2018: In the market sell-off this February, defensive assets failed to defend.
Read

Chart source: EPFR Global, Bernstein

our thinking
Inflation: bad for portfolios, good for society?
As inflation has soared to its highest level for 40 years, financial markets have taken fright, with most bond and equity markets down significantly so far in 2022. In fact, the US is now officially in a bear market, and inflation pressures show few signs of fading – quite the contrary.
Swimming naked
July 2022: It is hard to overstate how far free and unlimited central bank liquidity has rewired the financial system. As central bankers extract themselves from the monetary rabbit hole they have burrowed their way into, the damage to traditional portfolios is likely to be considerable. This tightening of monetary policy is happening because inflation has returned – with a vengeance.
Ruffer round up – Q2 2022
July 2022: Investment Director Duncan MacInnes joins Rory McIvor for a review of the quarter, discussing the scale of wealth destruction across markets and how they see this rippling out into real world behaviour, and looking forward to what could be on the horizon and what that means for investors.
Audio icon
Investment Review
July 2022: Jonathan Ruffer explains why wage demands are the final element required to fuel the new inflationary epoch. This regime will be good for social mobility in the long run, with the workforce and innovators as the winners. But it might well be brutal for the investment community.
Audio icon
OUR THINKING
London
80 Victoria Street
London SW1E 5JL
Edinburgh
31 Charlotte Square
Edinburgh EH2 4ET
Paris
103 boulevard Haussmann
75008 Paris, France