/ PASSIVES /
“ A STRANGE PARADOX ” “ There is a strange paradox where passives can ’ t survive without active funds and actives do better when passives dominate ,” he says . “ The efficient market hypothesis assumes analysts are looking at every company in the universe and know all the information . If you don ’ t have an active community , there won ’ t be an efficient market .”
“ Once one-third of the market is in passives , it becomes less efficient because companies are not as well researched and there are more opportunities for active managers . The US is approaching one-third in passives , so it is close to a tipping point .”
This is a view echoed by Eric Syz , chief executive of Syz Group . “ If passives dominate the investment world , there will be no more discrimination . In other words , companies ’ prices will no longer go up or down as a result of how well they are doing . Passives will simply invest according to what the market cap is .”
Carlos Hardenberg , manager of the Templeton Emerging Markets Investment Trust , says another problem with the trend towards passive funds relates to the responsibility that active managers have in holding company directors to account .
“ Maybe I am ‘ old school ’ here , but when it comes to addressing trustnetdirect . com 15