The Portfolio Reset: Episode 2

Space Exploration Technologies

Across the shows: 17 speakers in other episodes, 12 bullish and 5 bearish calls, past 30 days

• Matt Levine · BloombergUncertain

  SpaceX's IPO at about 100x revenue is a giant valuation, forcing index providers into judgment calls.

  SpaceX listed at a valuation of about 100 times revenue, which Levine uses to show why index inclusion is not neutral. Some argue leaving it out means missing a valuable company, while others argue including it at this inflated valuation will push it down and hurt index investors. He also notes that much of the growth before the IPO accrued to private investors. The company could grow into a much larger valuation, so buyers right after the IPO might do well, but the entry price is already high. Levine presents both sides and does not commit to a direction, so the stance is uncertain.

  “Right? And so you have SpaceX going public at a giant valuation that's 100 times revenue.”at 19:43

Market sentiment, positioning & volatility

• Michael Green · Tier1 Alpha Asset Management

  Passive funds are de facto active investors, deploying inflows continuously via the simplest possible algorithm.

  Green argues that passive funds are not truly passive. They receive cash inflows every day and must reinvest that cash in the index's proportions, which creates additional buying flows. Because the reinvestment happens continuously, passive funds act as active investors. They just follow the simplest algorithm: buy when cash comes in and sell when cash goes out. This explains why passive investing may be distorting capital allocation across markets.

  “They are always active investors because they are deploying capital continuously. They're just active investors that operate off of the world's simplest algorithm.”at 13:27

• Simon Evan-Cook · Downing Fund Managers

  Passive inflows push up prices regardless of valuation, weakening the capitalist case for the stock market.

  Evan-Cook argues that money entering the market through passive funds is not concerned about what it buys. It pushes up the prices of whatever is in the index, whether those stocks are cheap or expensive and possibly overvalued. Passive investing started as a small part of the market, and Jack Bogle said it works only when most investors make active decisions. Evan-Cook says passive flows now drive the market, so the question is who is driving it. He argues that when no one looks at balance sheets, debt or management quality, the case for capitalism, which the stock market is supposed to embody, is weakened.

  “If you've got money coming into the market and it is not particularly worried about what it's buying, it will push up the price of the things that it's buying. And that's regardless of whether these things are cheap and worth buying or expensive and possibly overvalued.”at 14:29

Private markets for individual investors

• Paul Kearney · Asset Risk Consultants

  Private clients struggle to access the top private equity returns that large institutions capture.

  Kearney says the private equity space is dominated by large institutional players that have backed the most successful firms for decades. Those institutions have access to the best managers, so individual investors cannot easily earn the same returns. He makes this point in the context of private equity dispersion: top managers are excellent, but weaker ones can underperform, and retail investors are less likely to reach the top funds.

  “The private equity space is dominated by large institutional players that have been backing the most successful firms for decades. It's very difficult for private clients to get that same type of return.”at 8:02

Private equity

• Matt Levine · Bloomberg

  Private equity's huge size has turned it into a mass-produced index-like product, not a source of best-company returns.

  When private equity was about 1% of listed equities, buyout funds could target the most poorly managed companies with weak capital structures and earn huge returns from fixing them. At around a trillion dollars, private equity behaves like a competitor to an index fund. It buys a broad set of companies in a slightly different way. Private equity argues its incentives and capital structures should produce higher returns, but Levine says that is not clear. Investors end up with a mass-produced beta-like product rather than the best companies or the best buyout firms.

  “When private equity is like a trillion dollars, it's like a competitor to an index fund. You're kind of buying every company... And what you're not getting is the best companies or even the best buyout firms. You're getting sort of like a mass produced beta like product.”at 9:56