Have we reached peak passive? Is it time to treat index membership as a risk factor and thus a possible source of returns? John Authers’ most recent opinion in the August 31st issue of Financial Times analyzes an age-old debate and offers some interesting insights about the dynamics of active and passive investing.
Interestingly, Authers raises some criticism and concerns about passive management while discussing why active management is essential to the markets.
Key points include:
- “The debate between active and passive investing is caught between two polar extreme cases, both of which are beyond mathematical doubt. The first case is that whatever active managers do, an index of the market will do better than the average active manager...
- “…A second mathematical necessity is that we cannot have all-passive management. No shares would change hands. Attempts to use markets to allocate capital well would collapse. The stock market would cease to be a market.”
- “Neither proposition is contestable. It makes sense for any given investor to use passive funds and reduce the fees paid to the investment industry; but passive management can go too far.”
- “I don’t think, to be clear, that all of this proves that peak passive is here. The topic needs far more work. But it is very suggestive, it is time to treat index membership as a risk factor in its own right, and as a possible source of returns.”
Read the
full article from the FT.