FINC3017 Investments and Portfolio Management

Task:

In your essay you are required to discuss passive investing, and the implications for market efficiency from current investment trends. Use the dot points below to structure your essay, which culminates in a proposed investment strategy.

Your essay should:

• Define passive investing and explain how it differs from active investing

• Discuss the approaches currently used by retail investors to passively invest in equities markets, and consider how this may have changed over the past twenty years

• Examine the growth of passive investing over the past twenty years, particularly in contrast to active investing, and identify possible reasons for this pattern. You should consider researching the size of assets under management, fund flows to active and passive investing, and the relative performance of active and passive investments

• Discuss Michael Burry’s quote in the context of market efficiency. What are the implications for asset-pricing models such as CAPM?

• In the same interview, Burry suggests there is a passive investing ‘bubble’. Explain what a price bubble is and how it is linked to passive investing in equities markets. What are the characteristics of equities that are most exposed to a passive investing ‘bubble’?

• Detail an investment strategy that could be used to exploit a passive investing ‘bubble’, making sure to explain why/how your proposed strategy has merit, the type of investor that might consider implementing your strategy, as well as any limitations or risks. Note, you can consider any assetclasses or types of securities in your investment strategy.

• Provide a conclusion which summarises the above points Marks will be awarded for the depth of discussion, as well as the clarity and structure of your essay. Your essay should include both academic AND high-quality, non-academic references. Your essay can discuss any asset classes (i.e. equity, fixed income, etc) and/or investment strategy if it is relevant to your discussion, but should be based on a well-supported argument. You are encouraged to (where necessary) use appropriately sourced statistics to support your arguments.