continue
It’s inflating the prices of
the biggest stocks. This is
not how indexing works. If
the price of a stock rises,
its weighting in the fund
increases automatically.
The fund doesn’t need to
buy more shares or sell
them in companies whose
stock is falling. The bulk of
trading — around 95 per
cent — is carried out by
active managers.
It’s making markets less
efficient. There is more
price-setting going on now
than ever, with more than
80 million trades placed
every day. And, by forcing
the worst-performing fund
It’s undermining corporate
governance. Active
managers’ record on
corporate governance
isn’t exactly impressive;
just look at their failure to
control boardroom pay.
Passive managers, who
have no choice but to
carry on holding stocks
and work with company
management, are better
placed to make a positive
difference. The evidence
shows they are bringing
their influence to bear.
And finally… It’s a danger
to global capitalism.
Two things. First, indexers
believe in the capital
markets more than
anyone; we believe they
work and that, over time,
they deliver fair returns to
those who patiently invest
in them. That hardly makes
us communists. Second,
indexing allows consumers
to invest in far more
stocks, far more efficiently
and far more cheaply
than ever before. Surely,
if anything, indexing
is the very essence of
capitalism.
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It’s causing the
misallocation of capital.
It’s true that allocating
capital to the most
deserving enterprises is
an important function
of active management.
But new public offerings
account for a tiny amount
of trading. The vast
majority of the time, active
managers are simply
trading with each other.
It’s going to go badly
wrong in a correction.
One of the most
common myths about
active managers is they
outperform passive
managers when markets
fall; the data clearly
shows they don’t. It’s also
suggested indexers will
take fright and bail out
when the bull run ends,
yet the opposite happened
in the financial crisis.
managers out of business,
isn’t indexing making
markets more efficient?
IA North America (-18.36%)
5%
It’s out of control.
Nonsense. Only around 20
per cent of global stock is
owned by index investors.
Even in the US, where
passives are most popular,
active management is the
default investment style. In
large swathes of Europe,
Asia and South America,
indexing has barely made
inroads at all.
S&P 500 (-13.39%)
Here are some of the more common myths about the growth of indexing
that keep doing the rounds
PERFORMANCE OF SECTOR VS INDEX IN 2008
The myths
FE TRUSTNET
[ PASSIVE INVESTING ]
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Cover story
Source: FE Analytics
consistent outperformer in advance,
net of costs, is almost impossible.
Simple arithmetic
Logically, none of this should be
surprising. Active managers effectively
are the market. In aggregate, they
deliver the market return. But they
charge handsomely for this service and,
when added to the trading expenses
they incur, these costs are substantial.
Compounded over decades, they can
easily wipe out a third or more of the
investor’s eventual returns.
The average passive investor, then,
must outperform the average active
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