Baillie Gifford is an Edinburgh investment partnership founded in 1908, famous for ultra-long-horizon, high-conviction growth investing — its early stakes in Amazon, Tesla and NIO are classics. Its "actual investors" philosophy holds world-changing companies on 5-10 year views; AUM is around $120bn. The Insights column carries its managers' investment views and thematic research.
More people are buying stocks based on indexes or hot trends, which can push good companies' prices away from what they're really worth. That creates opportunities for those who study businesses carefully, but the ride will be bumpy. The article also shows how one fund added banks and energy stocks to smooth out returns, making it easier for investors to stay patient. For ordinary investors, the key is not to avoid ups and downs, but to make sure your holdings are genuinely valuable and your portfolio is balanced enough to weather short-term swings.
The rise of passive investing and new market participants (such as retail trading platforms, ETFs, hedge fund "pod shops," and algorithmic trading) has altered the price discovery mechanism, directing more capital to flow based on rules and trading volumes rather than fundamental value. This has mad
The report argues that market efficiency is not a mathematical question of perfection, but a dynamic system shaped by investor behavior. Currently, the rise of passive investing and new trading instruments is fundamentally altering the price discovery mechanism. More critically, the report presents a core paradox: the market is more prone to mispricing (price deviating from value) due to non-fundamental-driven capital flows, which in turn creates greater opportunities for true long-term active investors to generate excess returns — but at the cost of a bumpier return path that tests investor patience.
Contrary to the prevailing consensus that "passive investing makes markets more efficient," the report argues that a passive-investing-dominated market may actually exacerbate short-term mispricing, as more capital flows in based on rules, flows, and narratives rather than fundamental value.
1. The Scale Shift in Passive Investing: From 2006 to 2025, U.S. stock index funds saw cumulative net inflows of approximately $3.2 trillion, while active management funds experienced nearly equivalent outflows. The share of passively managed assets rose from less than one-third to over 60%, with total assets exceeding $19 trillion. This capital is allocated according to index weights and rules, not based on analysis of company fundamentals.
2. The Explosive Growth of the ETF Ecosystem: ETF assets under management surged from under $1 trillion in 2010 to $13.4 trillion in 2025. The number of ETFs listed in the U.S. now exceeds the number of listed companies. Many ETFs incorporate leverage, and the rapid creation and backtesting of thematic ETFs (e.g., the "Deadlift ETF") demonstrate that capital can be allocated purely on the basis of narratives and themes.
3. Extreme Cases of Narrative-Driven Markets: In February 2026, a fictitious internal memo (describing economic instability caused by AI success) was widely circulated. Despite no new company announcements or economic data to support it, the memo triggered a massive sell-off in software and technology stocks, with an estimated $700 billion in market value wiped out. This illustrates the power of narratives to surpass fundamentals in the short term and become the core driver of price volatility.
| Company/Theme | Role | Key Data | Author's Stance |
|---|---|---|---|
| Passive Investing (Index Funds/ETFs) | Core transformative force, the primary vehicle for shifting capital from fundamental analysis to rules-based and flow-based allocation. | Passive assets exceed 60% of total, with total size over $19 trillion; ETF assets grew from $1tn in 2010 to $13.4tn in 2025. | Neutral observation, but clearly identifies its role in amplifying non-fundamental-driven capital flows. |
| Thematic ETFs (e.g., "Deadlift ETF") | Symbolic case illustrating how themes and narratives are quickly packaged into tradable products and attract capital. | Backtesting showed the ETF outperformed the S&P 500 by 140% (2.4x) over 4 years. | Typical example used to demonstrate the rising importance of narrative and thematic screening in investment decisions, with systemic implications. |
| Narrative-Driven Trading | New behavioral pattern among market participants, amplified by social media and emerging tools. | A fictitious internal memo caused a $700bn market cap loss, unsupported by new information. | Highlights risk, viewing such narrative-driven price volatility as both a challenge and an opportunity for long-term investors. |
1. Actionable Direction: Investors should actively exploit short-term mispricing caused by non-fundamental factors (such as index rebalancing, thematic ETF flows, and market narratives). This implies constructing a more patient, longer-term portfolio structure that can withstand short-term drawdowns, in order to capture excess returns from price reversion to value. The implied investment direction of the report is: increase allocation to individual stocks with deep fundamental analysis and that are insulated from short-term flows and narratives.
2. Perspective Bias: As a well-known long-term growth active manager, Baillie Gifford's views naturally carry a narrative of "the return of active management value," which may underestimate the short-term market impact of thematic ETFs and narrative trading, as well as the risk of passive investing's self-reinforcing cycle in inefficient markets. The core motivation is to argue for the unique value of its own long-term investment strategy in the current environment.
The report argues that in a market flooded with information where prices can easily diverge from fundamentals, the value of long-term stock selection actually increases, but maintaining patience becomes more difficult. Therefore, the core objective of portfolio construction is not to eliminate volatility, but to ensure that the portfolio's "discomfort" stems from intentionally assumed stock-specific risks, rather than incidental factor exposures. This allows investors to endure short-term volatility and ultimately reap the benefits of compounding. This argument differs from the prevailing market view that "passive investing and quantitative strategies have rendered active management obsolete" — the author points out that it is precisely these trends that create pricing dislocations, offering opportunities for truly patient active investors.
The author supports the argument through the following logic and facts:
1. Market Efficiency Paradox: Markets are deeper and more information-rich ("an amount of information unimaginable in any previous era of human history"), yet prices are more prone to prolonged deviations from fundamentals and exhibit greater volatility. The reason is that participant views tend to homogenize (driven by rules, flows, leverage), causing the "wisdom of crowds" to fail, and capital flows to rely more on short-term narratives than long-term value.
2. Investor Experience of "Volatility": Clients do not experience returns over a theoretical five- or ten-year horizon, but rather through a series of quarterly and annual difficult decisions of whether to continue holding. If a portfolio's returns are repeatedly dominated by unintended factor exposures (such as growth, value, size, interest rate sensitivity), investors may exit midway, forfeiting the compounding of high-quality companies.
3. Evolution of Global Alpha Fund Portfolio Construction (the main practical evidence provided by the article):
4. Patience Is Not Passive: The article emphasizes that patience is not "refusing to change", but rather using portfolio construction to create space to "continue holding and adding to controversial ideas", especially when the market narrative turns unfavorable.
1. Examine the portfolio's factor exposures: Do not focus solely on stock selection; quantify the portfolio's unintended exposure to factors such as growth, value, size, interest rates, momentum, and actively adjust to reduce the impact of short-term style rotation.
2. Broaden the definition of "growth": Do not limit growth to technology or defensive sectors; high-quality companies in cyclical industries (e.g., banks, energy) can also provide long-term returns and help improve the portfolio's volatility profile.
3. Portfolio construction is the "infrastructure" for patience: Long-term investors should use scenario analysis tools to simulate performance under different macro environments, and ensure that the portfolio's discomfort stems from "judgments about specific companies' futures", not from bets on market styles.
4. Accept purposeful "discomfort": Do not easily abandon positions during short-term drawdowns, but only if convinced that the drawdown is due to changes in the fundamentals of the holdings, rather than market sentiment or factor rotation. The former warrants caution, the latter may be an opportunity to add.
This section contains no valid investment analysis content, skip. The original text only includes legal disclaimers, compliance clauses, marketing guidance, and regulatory boilerplate language, and does not involve any investment arguments, evidence chains, or specific company/theme judgments.