The Portfolio Reset: Episode 2

Bloomberg Audio Studios.

Podcasts.

Radio.

News.

We have SpaceX shares indicated to open 29% above the IPO price of $ 135.

How big a deal is this SpaceX IPO?

I mean, the numbers are eye-popping.

How big a deal?

The biggest deal ever, literally.

SpaceX had the largest ever IPO.

It's now one of the most valuable companies in the world.

Nearly $ 2 trillion. That was the valuation SpaceX carried onto the stock market when it finally went public in June 2026. Not a scrappy startup, not even a fast-growing billion-dollar company. On its first day as a listed company, SpaceX was already one of the most valuable businesses on the planet.

And that's what made this listing so extraordinary. Because for public market investors, this is the beginning. But for SpaceX and all the private investors already, partly the company's journey, an enormous amount of the growth had already happened.

So rewind more than 20 years, back to 2002 when SpaceX was founded. Early investors were putting money into a company that was still trying to prove it could reliably get a rocket into orbit.

Any launch that goes well is significant, but this one is sort of a big deal because it proves out this basic idea that rockets and spacecraft can be reused successfully.

Then came the breakthroughs. Rockets landed, astronauts went into orbit, Starlink satellites filled the sky, and as the technology was being proven, the value of the company was climbing alongside it.

The latest funding round by SpaceX values Elon Musk's company at about $ 74 billion. Investors put in $ 850 million led by Sequoia Capital.

$ 74 billion there. Then hundreds of billions and eventually $ 2 trillion by the time SpaceX reached the public market.

So you just need to think about the difference between investors who got in along the way and the investors who arrived at the IPO. So the founders, the employees, the venture capitalists, the cleaners, other private investors, they all own SpaceX. while it was making that journey from an experimental rocket company to one of the biggest businesses in the world and still an experimental rocket company. But by the time it was listed, much of that extraordinary increase in value had already happened.

We wanted to bring you to the floor of the NASDAQ, where SpaceX executives are ringing in today's trading. They're celebrating the launch of their highly anticipated historic IPO. Now that bell marked the moment that SpaceX finally entered the public markets, but it also marked something else important. A huge amount of wealth created by one of the defining companies of the past two decades being created before it even got there.

And that matters if your investment strategy is built around one very simple idea. Buy the public market and let capitalism do the rest.

Some of the most important companies of this generation have been able to raise enormous amounts of money without going anywhere near a stock exchange.

We are now going to break records in 2026 for IPOs and secondaries. And SpaceX, of course, is the granddaddy, kicking it all off in a big way. But we're going to see OpenAI and Anthropic and probably some others.

They are staying private for longer, and they are becoming bigger while they're private. Welcome back to our special miniseries, The Portfolio Reset, getting your money to do more. I'm Meryn Somerset-Webb, editor-at-large for Bloomberg UK Money and author of the weekly Meryn Talks Money newsletter.

And I'm John Stepik, senior reporter and author of the Daily Moneyed Stilled newsletter.

And over three episodes, we are questioning some of the assumptions underpinning markets today and how to think about what that might mean for your own investment strategy. This is episode two. So if you haven't listened to episode one, go back and do that first. In that episode, we looked at how passive investing went from a genuinely revolutionary idea to something approaching the default investment strategy.

And we also explained how rising concentration in major indices, particularly in the US, is making passive portfolios less diversified and potentially more risky.

In this episode, we're going to continue to look at how the market around passive investing is changing and how passive investing is in turn changing the market. We'll look at how fund managers are now trading around passive flows and how the rules that decide what's get into an index can shape the way passive investing works. We explained in the first episode of this series that for decades, one of the great attractions of passive investing was very simple– If you buy the market, you will profit from the growth of the next generation of winners. But that logic doesn't apply anymore if more of that growth happens before those companies ever enter the market you are buying. Yeah, man.

So 20 or 30 years ago, you could realistically say, if you want exposure to capitalism overall, then just buy public markets. But today, it's not as clear that those two things actually overlap quite as neatly.

You see things like SpaceX going public at a $ 1. 8 trillion valuation. Maybe it will grow rapidly into a $ 20 trillion valuation in the next few years, and the people who bought right after the IPO will do great. But $ 1. 8 trillion is a lot of money, right? A lot of growth that has happened at SpaceX over a long period of time has gone entirely to private investors.

That's Bloomberg columnist Matt Levine making a point that brings us to a fairly obvious question, John. If I am missing all this growth because I'm stuck in public markets, why don't I just invest in private markets instead?

Yeah, I mean, that sounds good. But unfortunately, it's not quite that easy. I think there's a danger here that's really worth kind of spending a bit of time on. So we all know now that private markets are increasingly being sold to individual investors as the next great opportunity. And that includes things like governments being desperate to cram them into your pension fund. There's an incredibly large difference between saying that some of the world's best investments have been in private markets like SpaceX or whatever, and saying that private market investments that you can get hold of right now are going to also be the world's best investments.

It's all about access, isn't it?

Yep. The private equity space is dominated by large institutional players that have been backing the the most successful firms for decades, it's very difficult for private clients to get that same type of return.

That's Paul Kearney at Asset Risk Consultants. And there's a particularly nasty statistical problem here as well, which is that private equity returns are hugely dispersed. So the best managers have absolutely extraordinary records, but the less good ones can be less spectacular.

Yeah, exactly. And so knowing that Yale or some other giant famous pension fund has made fantastic returns from private equity, isn't terribly helpful if you can't invest in the funds that they invest in.

Exactly. And Bloomberg columnist Matt Levine makes a different but rather related argument, which is to say that the private equity sector in itself has now become absolutely enormous and its sheer size in itself changes the returns that you can potentially get from it.

When private equity was 1% of listed equities, then you're getting Kind of the lowest hanging fruit, right? You're getting, you know, buyout funds, buying the companies that are most susceptible to being improved by the private equity playbook that are most, you know, poorly managed or, you know, have the poorest capital structure. And you can get huge returns from private equity.

So in other words, try and imagine private equity as a small group of super clever people hunting around for badly run businesses that they can pick up cheaply, fix and sell on. Also, imagine those people are really very good at it. Now, if that's what's happening, there could be enormous returns available. But then imagine suddenly that you've got much, much more money piling into the same strategy.

And at the same time, maybe the managers aren't quite as super clever. And it doesn't work in the same way.

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 you're buying them in a slightly different way where private equity would argue you have better incentive structures for management. You have better capital structure. You should expect a higher return, but it's not clear that's true.

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.

Okay, so that's the first problem. Passive investing alone no longer gives you exposure to some of the best companies because those aren't even being listed anymore. And you can't fix that problem for yourself by investing in a random private equity fund because that's not the same as it was either.

Let's start with an aspect change in the market that means passive is not always cracked up to be. And that is it's actually attracting too much of our money now. Is it becoming too dominant?

When the idea of passive investing initially took shape, it was a tiny participant in a market dominated by people actively deciding what individual companies were worth and buying or selling them on the back of that decision. But this is not the market that we have today.

Jack Bogle himself always said that this will only work when it's a small part of the market, because what that market relies on are the collective decisions of Loads and loads and loads of different investors.

That is Simon Evan Cook, fund manager at Downing Fund Managers. And his point is that passive investing needs active investors.

Yeah, and that's absolutely right. Because for a tracker to work, someone has to be doing the work of deciding what the companies in the tracker are actually worth. And Simon's argument is that this balance has now shifted and shifted too far in the wrong direction.

Back in the 70s, just a tiny little piece of the market that was aping what everyone else was doing. Fast forward to today, the market is increasingly driven by passive flows. So the question is, who's driving the bus?

What happens when passive goes from being a passenger in the market to being one of the biggest vehicles in it, possibly even the actual driver?

Yeah, I think this is really worth unpacking because this kind of gets to the heart of the problem. Because if you think about what fundamentally investing is about, that starts with the company. It starts with its profits, its debt, its management, its prospects, whatever dividends it might pay. You weigh all that up and you ask a simple question.

Given what I know, is this company worth buying at today's price?

The key point is that a passive fund doesn't even do it. Money comes in, investors buy the tracker, the fund allocates it according to the rules of the index, money goes out, and the fund then sells according to those same rules.

Every single day, they receive inflows from investors in the form of cash, and that cash needs to be reinvested in the manner of the portfolio. That cash deployment creates an additional flow. It also means that they are never passive investors.

We spoke to Michael Green about this idea. He is a former hedge fund manager who worked for Canyon Capital and for tech billionaire Peter Thiel. He's been pretty vocal about his belief that passive investing is in itself distorting markets. So he frames passive funds as being like super simplistic active funds, which I think is kind of a useful way to understand why this might be affecting overall 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. Did you give me cash? If so, then buy. Did you ask for cash? If so, then sell.

So here's the takeaway. Money comes into your ETF, your tracker, whatever you buy. Money goes out of the same vehicle. You sell.

That's the key point. So the ETF or the tracker fund is just a wrap-up. The money goes into that and it's then distributed to the stocks in the underlying index. And so that is what affects the index itself. So because of the way the money is directed, the biggest stocks get even more money and then they get bigger and then they get more money. And so it becomes a kind of self-feeding cycle. And also when and if people start to sell, for example, when they start to retire, the same process will go into reverse.

Yeah.

So you buy, you buy the ETF, the manager of the ETF goes out and buys the stocks. So money in, buy, money out, sell. So Simon Evan Cook makes a very similar point, just from a slightly different direction.

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.

Now, regardless of whether these things are cheap and worth buying or expensive and possibly overvalued, That.

Is exactly the concern. And that lack of interest from an index into whether things are cheap or expensive, something you wouldn't in the old days by the board or sold, isn't relevant. And that potentially changes the game for everybody else because the flows themselves can move prices, which means investors have an incentive not to think about the fundamentals, but just to predict where the money is going. So don't think about what a company is worth, not relevant anymore.

Just think about where the money is flowing.

Yeah, and this is the other point that is actually changing what even the active investors look for. So, for example, there's now a huge business in trying to predict these index driven flows. So Bloomberg recently reported. So in June, there's a big hedge fund group called Millennium Management and two teams there made about four billion between them, simply trading around expected index changes. And that was more than half of the firm's profits for the month. So it is actually a lot of money. And the basic idea is simple. You work out what stocks are likely to be added to an index and you buy them before the passive funds have to. And so you potentially benefit when all that passive money follows. And you do the

reverse for the stocks that are likely to be removed from the index. You short them before the index funds are forced to sell. So you're not actually betting on the prospects for the underlying company. You're betting on where the passive money is going to move next.

Sounds mad when you look at it like that, doesn't it? It also brings up a bigger philosophical question. So if your investor is looking at balance sheets or talking to management and making the decisions about where capital deserves, keyword deserves, to go, then who actually performs that vital function?

Well, exactly. And as Simon Evan Cook puts it, none of this is conducive to traditional quality-focused allocation of capital.

If you have suddenly got a problem where nobody in the market is really particularly caring about what a balance sheet looks like, what a company's debt level is, how good the management are, then, yeah, that to me weakens the case for capitalism, of which the stock market is, you know, the central beating heart.

Capital allocation is no longer primarily driven by investing in the best companies. It's driven by pumping ever more money into the biggest companies. Now, John, remember how we started this episode with SpaceX? And we did that because it's a great example of a company that has had most of its extraordinary growth in private before finally coming to the public markets.

Which, as we explained, is a big problem for passive investors. But we also chose to start the episode with SpaceX because it illustrates some of the other challenges to passive investing that we've been talking about. And that is once a company like SpaceX does go public, What are the index providers then supposed to do with it?

SpaceX is a quite large chunk of the investable universe of US large cap stocks right now. And so if you run a US large cap index, you might think, well, we'd better have SpaceX in our index because it's a large chunk of the investable universe. And if we don't have it in our index, then we are not tracking that universe for our investors.

That's Bloomberg columnist Matt Levine pointing out the first problem. If SpaceX is big enough, leaving it out starts to make the index look less like the market that it's supposed to represent.

But overlaid on that, you have one historical index rules that could be as simple as like, we will wait a while after a company was public to include it in the index, or it could be as complicated as the S & P' s rule of we require sustained profitability before we include it in the index. And so SpaceX does not meet that requirement.

So the index providers can't simply say, it's huge, put it in. They have rules and SpaceX might not fit those rules.

And then also you have just people's very, very, very strong views about valuation, right? And so you have SpaceX going public at a giant valuation that's a hundred times revenue.

And this is where it becomes much more uncomfortable for something that is supposed to be passive.

You have some people saying, if you don't put SpaceX in the index, we will miss out on this incredibly valuable company and that will be bad for index investors. And you have other people saying, If you put SpaceX in the index at this incredibly inflated valuation, it will go down and that will be bad for index investors.

Either way, somebody has to make a judgment.

And so as an index manager, you have to make decisions that are to some extent like philosophical about like the meaning of your index and the value of your rules and are to some extent valuation decisions.

And this gets right to the problem with the word passive and the very thing that we've been trying to get across so far in this series. There is no entirely neutral answer. There's nothing you can do that is genuinely passive. You include SpaceX, immediately you have made a decision. You don't include it, you have made a decision. change your rules so that you can include it, and you have definitely made a decision and a very, very active one at that. So as Matt points out, if you're an index manager, you might not think of yourself as a fund manager in the same way that active fund managers have been thought historically, but that doesn't mean that you're not going to have to make judgments. You're going

to have to make philosophical judgments. You're going to have to make moral judgments and even valuation judgments about what your index is supposed to represent.

Yes, so regardless of this word passive, somewhere along the chain, somebody has.

To be active. Exactly, which brings us right back to something that Paul Carney told us at the very beginning.

There was no such thing as passive investing because investing means the creation of a portfolio which requires judgment.

Okay, so after all that, what am I actually meant to do?

I don't know, John.

I don't know.

I'm not telling you to do anything. I would never, ever do that. But what I am saying is that no one should stop using passive funds.

Oh, good. That is a relief. I'm glad to hear that, at least.

Yeah. But they're exactly as they always were. They're incredibly useful. They're cheap. They're simple. And they can give you this wonderful, broad exposure across the market. I mean, it's not as broad as you once thought, but it still is pretty broad. And what we are saying is that passive investing is just a way of buying investments. It's a way of investing.

It's not actually an investment strategy in itself. And this, I think, is where Paul makes the most useful distinction of all.

Passive is the way you implement, not the way you build a portfolio. That can only be about active judgments.

So in other words, yes, you can use passive funds to build a portfolio. But in doing so, you are not doing anything passive. You still have to build a portfolio. You have to decide, yes, you, how much you want in equities, how much in bonds, how much in gold, how much in America, how much in technology, how much in emerging markets. And whether the risks that you are taking when you put that portfolio together actually matches with what you want that money to do. When your end goal is.

You know what? All of that sounds suspiciously like active investing.

Yeah.

We're going to give it a different name, John. We are not going to call it active investing because that would be rude to active investors. What we're going to do is call it something else, something quite good, I think. Active decision-making.

Active decision making. I like that. So this is the most important lesson from this episode. You don't need to become a stock picker. And quite frankly, you probably shouldn't unless you've got a lot of time and you're really good at it. You'll probably lose money. But you do need to become the active manager of your own asset allocation.

You need to be an active decision maker. And that starts not with asking what's going to go up next, but with a much more boring question. What is this money actually for?

Yeah, John, it's pretty boring. But it is very, very important. If you are 25, for example, you are investing for a retirement that is 40 years away, maybe, sorry to be depressing, but maybe 50 years away at this point. And that's another podcast altogether. So that's one portfolio. If you're saving for a house deposit that you need in three years, four years, five years at this point, please wait, everybody.

That is something completely different. So before you start looking at these building blocks, you have to work out what you're trying to achieve. Then you can start assembling your equities, your bonds, cash, gold, different countries, different kind of companies. And then you can start looking at different types of funds, both passive and active, that may be a good way of getting into those themes. So you've got to start from the end goal and then you've got to work backwards.

So all this means we end up somewhere slightly uncomfortable, somewhere where passive investing is absolutely not a bad idea. But the phrase by the market doesn't mean quite what it did. So passive is bigger than it was. And that means that it has almost certainly, I think I would actually go certainly, it has changed the way that markets work at the same time. The market cap weighting that we talked about earlier has left portfolios really concentrated in the winners of the last decade and particularly in technology.

And at the same time, lots of the growth that you might want exposure to, both in technology and other things, by the way, is taking place outside public markets. So even when you start deciding what passive index to own, you've got to think about geography, about asset classes, about concentration, about risk. And this isn't easy. There isn't an easy way to do it.

Right, so we're definitely not saying abandon passive. What we're asking you to do is don't confuse passive implementation with passive thinking. Your portfolio still requires judgment regardless of how hands-off you want it to be. And that is what's going to take us on to episode three. We spent two episodes telling you how we got here and what's changed.

But next time we're going to get into the really fun bit.

We get practical. What does a portfolio reset actually look like? And how do you work out how much risk you should be taking? I think that's honestly what's keeping us down. Lack of ability to take the risks that are meaningful or important to us. Well, look at how you spread that risk.

The answer probably always is to diversify across rather than try and pick winners.

And we'll challenge some of the old rules about what actually belongs in your portfolio. I don't think young people need bonds. Dope.

What did you own?

How much did you own? And how do you put it all together for the long term?

All coming next week. Really looking forward to it.

Yeah, me too. Thanks for listening to the second episode in our three-part investment series. And a reminder, we will have a final episode addressing listeners' questions. So please do send them into our show email, merrimoneyatbloomberg.net. You can send it in as an email or a voice note. We may even play your question on the show. And as always, if you like this episode, share it with a few friends and leave us a review wherever you listen to your podcasts. This episode was produced by Sam Asadi, Moses Andam and Jennifer Seeley. Amy Keene is executive producer for Talk Podcast and Cheryl Brumley is our head of podcast.

We will be back next week with more.

The Portfolio Reset: Episode 2

Kapitelklicken springt direkt hin

Shownotes

Transkriptvom Podcast bereitgestellt · Zeitmarken springen hin