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An update on active vs passive management


The first graph from Indexes Beat Stock Pickers Even Over 15 Years explains the second.




Source: https://www.ici.org/pdf/2016_factbook.pdf


Active managers have had a tough go of it lately, moreso for their customers. No doubt more money will continue to be withdrawn from many underperforming active managers of public and private funds in favor of passive indexing, and the trend will continue and likely accelerate.

We are intrigued by how long it has taken this notion to get traction, particularly in the fiduciary realm of pensions & endowments, but that is perhaps a topic for another day or right of private action.

Active investors do provide a valuable role in price discovery and governance. For a market to function we need investors to sell poorly performing companies (lower the price & kill the pig), buy well performing companies (to increase the price), and play an active role in governance (remove poor or corrupt management).

We do think there is some merit to the argument that index funds are to some extent ‘free riders in the market or function of price discovery. Actively managed domestic equity mutual funds incurred outflows for 10 consecutive years, and one suspects that as more of the market gets indexed, the less efficient price discovery will become. Yin needs yang.

We don’t think active investing is dead or beyond resurrection. Passive indexed investing now comprises about a third of US mutual fund $ assets. If you believe in arbitrage one might hypothesize an equilibrium at 50%. And no doubt this will create an opportunity for those hedge fund managers, at least those who can survive. Reaching equilibrium will take time.

These things are cyclical.



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