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His paper may be reasonable (haven't read much of it yet), but Pastor's article for the "popular press" is weak.
In the article, he writes that "As the active industry grows, more money chases opportunities to outperform passive benchmarks, and such opportunities become harder for managers to find." Of course that's not true in a vacuum. It is (at best) only true if the active industry is growing as a percentage of the whole market; otherwise the opportunities would become easier, not harder, to find by his own reasoning.
In fact, that's what he says on the first page of his paper, that what matters is S/W where S is the size of the actively managed industry and W is the "total amount managed actively and passively". (I hope by that he means the whole market and not just the fund industry, because then otherwise it would suffer the same problem - people could be pulling money out of funds and buying stocks directly - this would not be shrinking the total market size.)
In the article, he puts forth this analogy: "think of active managers as police officers and of mispricing as a crime. If there were no officers patrolling the streets, there would probably be some crime. But as the number of officers increases, the amount of crime is likely to decline."
True as far as it goes, but a pathological (corner) case. To complete his analogy, you don't need a lot of active investors to police stocks. All you need is one officer watching every home (stock) to ensure there are no burglaries. That's a far cry from suggesting that without a significant percentage of actively managed funds mispricing will be rampant.
Comments
In the article, he writes that "As the active industry grows, more money chases opportunities to outperform passive benchmarks, and such opportunities become harder for managers to find." Of course that's not true in a vacuum. It is (at best) only true if the active industry is growing as a percentage of the whole market; otherwise the opportunities would become easier, not harder, to find by his own reasoning.
In fact, that's what he says on the first page of his paper, that what matters is S/W where S is the size of the actively managed industry and W is the "total amount managed actively and passively". (I hope by that he means the whole market and not just the fund industry, because then otherwise it would suffer the same problem - people could be pulling money out of funds and buying stocks directly - this would not be shrinking the total market size.)
In the article, he puts forth this analogy: "think of active managers as police officers and of mispricing as a crime. If there were no officers patrolling the streets, there would probably be some crime. But as the number of officers increases, the amount of crime is likely to decline."
True as far as it goes, but a pathological (corner) case. To complete his analogy, you don't need a lot of active investors to police stocks. All you need is one officer watching every home (stock) to ensure there are no burglaries. That's a far cry from suggesting that without a significant percentage of actively managed funds mispricing will be rampant.
For your perusal, here's the paper.