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This week we speak to Matt Gibson, head of Manager Research at LCP. Matt’s been asking some interesting questions about passive investing of late, which we debate, including: does the success of passive (ironically) rest on a belief in active management? And, should the onus be on passive managers as opposed to active managers to justify their approach?

We run through the arguments for passive today and rather than rehash the passive vs active question, discuss which markets Matt thinks passive makes more sense in and those where there’s more support for active.

Links mentioned:

• Matt’s recent Vista article: Every passive investor should believe in active management  
• LCP Vista Spring 2022

We discuss:

• Does every passive investor need to believe in active?
• Why ask these questions, why now?
• Should passive be the “default” idea against which active is compared or the other way round, particularly when it comes to new markets (e.g China A shares)
• Recapping the thinking that underpins passive investing as it pertains to the pricing of securities and allocation of capital
• A framework for thinking about where passive works best and where investors might want to prefer active management
• The role of index providers and the important relationship of index provider, calculator and asset manager – and where this can go wrong for the investor

What's one thing to take away?

Don’t default to passive in all markets, think about it, review its appropriateness, the burden of proof should be with passive manager.

The most underappreciated thing about investing?

Holding nerve on underperformance is something investors get wrong a lot: people lose faith quickly, read across from underperformance to other smaller monitoring points, and jump to a conclusion at the wrong time which locks in a loss. A sell decision is often justified on other points but often really driven by underperformance.

Recommendations:

• The Way We Live Now (Wordsworth Classics)

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Each LCP investment uncut podcast is for information and marketing purposes only and does not constitute any form of investment or financial advice or a financial promotion (under the Financial Services and Markets Act 2000). All views expressed by the podcast hosts and guests are purely their own opinions and do not represent those of LCP, its clients or affiliates. Our podcast listeners should always seek independent financial or legal advice before making any financial or investment decisions. Please refer to the Legal Notices section on the LCP website for further information.​