While Passive Investing Soars, Buffett Bets On Banks

  • November 15, 2018 05:15 AM AEDT
  • Team Kalkine
While Passive Investing Soars, Buffett Bets On Banks

Warren Buffett's Berkshire Hathaway, on Thursday i.e. November 15, 2018, morning revealed that it has taken a $US4 billion stake in JP Morgan which added to the basket of financial services companies including Wells Fargo, Bank of America and American Express.

A $US460 million in insurance company Travelers and $US2.1 billion stakes in Oracle which are Buffett's other new additions in the quarter. There will be no shortage of analysis on his latest move, as Buffett being the most high-profiled active investor on the globe, particularly approaching as it does against the background of a US market on Wednesday night that fell for the fifth straight session.

On American growth, Buffett has always been long, and many will read the Oracle and Travelers along with JP Morgan bets as evidence that his belief has certainly not lowered. Wednesday night also saw the release of data underlining the tremendous growth of passive investing, while markets still stop to check what the world's biggest active investors do.

Benchmarking giants such as MSCI, S&P Global and the London Stock Exchange Group's FTSE Russell division, represented as the Index Industry Association, created in the 12 months to June 30, released numbers show that there were 438,000 new indexes, taking the total number of benchmarks to 3.7 million.

There are around 50,000 stocks trading on exchanges, by way of comparison, around the world. Licensed to exchange-traded fund providers, it is the benchmarks which have fueled the boom in passive investing in recent years. For example, in the US, the amount invested has seen in ETFs rise from $US531 million to $US3.4 trillion in the last decade.

The IIA said the strongest growth had been in benchmarks that help environment, social and governance issues and fixed-income indexes. The largest growth on a geographic basis was in the number of indexes in the Asia Pacific region which grew 2 percent over the year.

The industry association said, smart beta and factor indexes which help investors track stocks with characteristics such as strong momentum or low volatility rather than tracking companies by market value or in industries also saw strong growth.

There's never of course a shortage of warnings about the dangers posed by passive investing generally or to passive investors specifically. A threat to their growth outlook has risen from 20 percent to 31 percent, the proportion of companies on the S&P 500 facing that, said. This group includes cable television networks, retailers, legacy technology hardware companies who are watching their customers flee to the cloud.

Giroux said at a press event, these pressures pose a challenge to passive investing because index-tracking funds can struggle to differentiate between industries and specific companies. In the first half of 2018 only, 41 percent active managers beat their benchmarks, JP Morgan numbers suggest.


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