FYI: The rise of passive asset management threatens to fundamentally undermine the entire system of capitalism and market mechanisms that facilitate an increase in the general welfare, according to analysts at research and brokerage firm Sanford C. Bernstein & Co., LLC.
In a note titled "The Silent Road to Serfdom: Why Passive Investing is Worse Than Marxism," a team led by Head of Global Quantitative and European Equity Strategy Inigo Fraser-Jenkins, says that politicians and regulators need to be cognizant of the social case for active management in the investment industry
Regards,
Ted
http://www.bloomberg.com//news/articles/2016-08-23/bernstein-passive-investing-is-worse-for-society-than-marxism
Comments
https://books.google.com/books?id=J2B2ZSLwRZ4C&pg=PT56&lpg=PT56&dq=index+funds+and+communism&source=bl&ots=7WPVMKPeVP&sig=0diy8QCdeZN7-ABoPGzLhgcnvHA&hl=en&sa=X&ved=0ahUKEwj6xcSnt9jOAhWE5xoKHY55AnYQ6AEIHDAA#v=onepage&q=index%20funds%20and%20communism&f=false
Also, this quote from the story is pretty funny: "The social function of active management, in a capitalist society, is that it seeks to direct capital to its most productive end, facilitating sustainable job creation and a rise in the aggregate standard of living." Increases in profitability can just as easily come from laying workers off, restructuring, share buybacks, and investments in labor saving technology. And many--some might argue most--active managers today care less about sustainable profits over the long-term, which may lead to job creation, than short-term speculation and price momentum of stocks. How stocks behave and the underlying long-term economic performance of the the companies they represent often diverge.
I don't worry this issue. Yes, in the recent past Indexing has attracted investor attention and money. According to Morningstar, equity Index products are 40% and bond Index products are 25% of the marketplace. Those numbers have grown substantially in the last decade.
But there will always be folks who believe they can better the Index benchmark. That's the nature of most investors; average is just not good enough.
The statistics tell the real story. Over any 10-year period, only about 25% of actively managed funds outdistance their benchmark, and the inhabitants of that select group change often. It's hard to pick individual active fund winners. Those stats decrease even more when a portfolio is assembled. Studies suggest that a passive portfolio outperforms an active equivalent portfolio over the long haul roughly 80% to 90% of the time. It's statistically easier to pick 1 winning active fund manager than picking a group of 4 or 5 such managers.
Active fund managers need to upgrade their game performance by a significant amount if they want to survive. Private investors are becoming more familiar with the disappointing active fund manager output. These guys are smart enough, but there are too many currently competing to neutralize each other, and they can't overcome their cost burden. It's a heavy load.
Active fund managers will survive, and so will we as we get smarter. Costs matter greatly.
Best Wishes.
And if that's true, what happens when we get to 51% indexed vs 49% active? Would that mean that a "minority" of active investors would then be determining the market?
And if that's true, what is the ongoing situation as the active share decreases further? More and more "influence" from fewer and fewer investors?
I'm getting too old too fast to have a scientific argument every time. I will use an analogy from my industry - IT (unfortunately, big mistake of my life) - it does not matter how good the design is, it is the implementation that ultimately matters. Why can't we stop the "is active better than passive or vice versa" debate? We simply know active managers suck at implementation. Until they prove otherwise, index.
The common investor has come to the conclusion that investment expenses matter, and after-expense performance matters more. If an actively managed fund is not consistently outperforming (after expenses) its reference index, then it should experience a net outflow of assets. And if its assets decline sufficiently, it should cease to operate. It is in fact a jungle out there, and there is no safe space or concern for hurt feelings in the investment jungle.
I agree with MJG that there will always be folks who think that they can beat the market -- such as hedge funds, self-proclaimed "smarter than the average" investors, and poorly informed investors who "trust" financial advisors who state that they can beat the market.
In general, objective data indicates that the default investment should be passive rather than active. That being stated, one must always respect the data, specifically SPIVA (S&P Indices vs. Active):
SPIVA 7/21/16
As this document illustrates, investors should favor actively managed funds only in Real Estate (Domestic Equities), International Small Cap (International Equities), and a small number of sectors within Fixed Income (Munis, Loan Participation, MBS, and Short/Intermediate IG bonds). The data indicates that investors should go passive for all other asset classes.
Kevin
Now, what you and @kevindow noted does make financial sense, eh?
But, money managers would put themselves out of work, yes?
I do believe that ego, the human essence and any other self esteem word one may discover has relationship to money managers.
I don't follow science up close; but the last time I checked, these folks sit upon the toilet just like the rest of us.
This recent CALPERS article offers clues and potential guidelines, if managers would accept defeat of their egos. Although one can not imagine many folks whose money is being invested are raising a glass of wine to these folks in celebration.
Hell, I've had to adjust my directions several times over the years from "realization factors"; and I'm not even investing "other peoples money" from which a poor rate of return (as with CALPERS) would cause me to be wholly embarrassed. I continue to be asked upon occasion about where to invest. My suggestions have changed from 10 years ago.
Take care,
Catch