Calm down, activistas — passive is a drop in the ocean

Posted by Robin Powell on February 9, 2016


Make no mistake, the fund industry PR machine is in overdrive. Every day in the trade press I see articles dissing passive and extolling active management. Most of them are big on rhetoric and light on factual detail, and as such barely warrant attention. But I did spot one such article yesterday that is worth mentioning — if only for its entertainment value.

The piece in question, Passives-only crowd taking heroin to treat a cough, was written by Graham Bentley and appeared in Professional Adviser. No, it wasn’t the extraordinary headline that struck me, but Graham’s announcement that he has taken it upon himself in 2016 “to support a gutsy little underdog in our industry, being unfairly bullied by what amounts to the advice industry’s petite bourgeoisie. Yes, it is time to stick up for active management.”

I can think of many analogies for it, but the notion of the hugely wealthy, powerful and politically well-connected global fund industry as a bullied schoolboy, having sand kicked in his face by wicked people like me, is frankly ridiculous.

Similarly laughable is the suggestion — repeated several times in recent weeks — that evidence-based investing has grown so big that we’re now in an indexing bubble. As my fellow blogger Ben Carlson pointed out the other day, we’ve had a closet indexing bubble for decades and it doesn’t appear to have had a detrimental impact on the running of the markets.

Yes, indexing (both the traditional kind preferred by the likes of Vanguard and the fundamental variety espoused by firms like Dimensional) has made considerable strides in the last few years. But most of that progress has occurred in the US, and even there, active management remains way out in front.

As Barry Ritholtz told TEBI in October, passively managed assets are still a drop in the ocean:

There are about $60 trillion dollars in liquid investable assets worldwide. Once you start bringing in non-liquid assets like art and collectable cars and jewellery, you can add another $20 or $30 trillion dollars in. We’re not even talking about real estate, which is another God knows how many tens of trillions of dollars. The index holdings of Vanguard are about $2 trillion. Add another few iShares and BlackRock indices, and what are we up to? $3 or $4 trillion? Out of 60 trillion it’s almost minor.”

It’s a mark of how indexing has taken off that people are starting to ask me what would happen if everyone indexed. It makes for a fascinating discussion, but a purely academic one. It’s never going to happen. There will always be a demand for active management; people will always be susceptible to clever PR and advertising, and part of us will always believe that we can find someone smart enough to beat the market.

I remember asking the author William Bernstein for his view on this, and his guess was that the proportion of active versus passive investments will eventually settle down at around 50:50. Bill is such a hugely intelligent guy that I’m not going to argue with that.

When will that happen? Not for a very long time — perhaps not even this side of 2075, the 100th anniversary of the first index fund for retail investors. I, and most of the other bully-boy “passivistas” Mr Bentley takes exception to, will be pushing up the daisies long before then.


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Robin Powell

Robin is a journalist and campaigner for positive change in global investing. He runs Regis Media, a niche provider of content marketing for financial advice firms with an evidence-based investment philosophy. He also works as a consultant to other disruptive firms in the investing sector.


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