To critics of the $11 trillion passive boom, active management is the original form of ethical investing — and time is running out to save it from the indexing onslaught.
“On a societal basis, it’s potentially disastrous,” says Michael Green, chief strategist at Simplify Asset Management, referring to the passive frenzy. “There’s an impending crisis that requires people to make changes.”
Fifty years since the first fund was created to mimic the moves of an entire market, naysayers fear the industry is now so big it threatens the capitalist social order.
Yes, it lowered costs, brought investing to the masses and improved returns for many. But the dark side according to the critics: It’s funneling money to undeserving businesses, distorting price discovery and intensifying volatility.
“Markets are ultimately not about funding someone else’s retirement but instead about allocating capital efficiently within an economy and creating the signals that encourage investment in the better companies,” says Green.
Read More: ‘Anarchist’ Mac McQuown Started an Index Revolution 50 Years Ago
His fears over the demise of stock picking are shared by a vocal contingent in full knowledge they’re likely fighting a losing battle.
Inigo Fraser Jenkins, head of global quantitative strategy at Sanford C. Bernstein, once declared passive investing to be worse than Marxism. Michael Burry of “The Big Short” fame tweeted that “passive investing’s IQ drain” is fueling a stock bubble. Yves Choueifaty, a Frenchman known for his $10 billion “anti-benchmark” strategies, once called it “completely toxic.”
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FTR I'm not buying it. Whatever downsides there may be to indexing are completely outweighed by its advantages.
Ah... but today you can index anything any which way you want. However, there are many things which indexing doesn't do, and it is a pure momentum strategy - buying more of assets rising in price BECAUSE their prices are higher and for that reason alone. This of course demonstrates simply that momentum strategies have dynamic power... but it is the anathema of value investors (if you're one of those rare animals that defines "value" strictly as "cheap" rather than holding as Buffet does that "a value that remains a value is no value"). By definition, the more indexing there is, the more opportunity there is for non-indexers. The indexer vs. the non-indexer is a straw man and has been since the 1970's when the first closet indexers emerged. Indexing is a tool. Tools are useful. Tools don't build a house, carpenters do. Indexing is particularly useful when you think a sector is a winner, but the risks are high and you don't have any skill in distinguishing between winners and losers, good opportunities and bad in terms of timing, etc. So it is very good, but sure, there are defects and people get bored when the market roars, or scared when it falls, and owning a non-descript fund rather than a basket of "the best" companies that the investor "knows something about" can be emotionally challenging for some, and they will quit at the bottom. Indexing doesn't help address that, nor does it help these folks re-enter after a crash as in March 2009 tells you something. Will power remains important... and the REAL key to success? Not losing and sticking with your program, and not getting greedy 'cause someone else is doing "better". There's always someone doing better... get over it.
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