I don't know in which thread this belongs, but this seems like as good a one as any. A recent article in the Financial Times,
Have we seen a peak in passive investing for the US? has this to say. First, a nice, succinct way to frame the debate over passive vs active:
The debate between active and passive investing is caught between two polar extreme cases, both of which are beyond mathematical doubt.
The first case is that whatever active managers do, an index of the market will do better than the average active manager. This is because in the current world of institutionalised asset management, the sum of all managed funds grows ever closer to the sum of the market. In the 1970s, when managed active funds were a smaller part of the market, it was possible for most of them to beat the market. Now, the triumph of index funds grows ever more assured. They represent the average of all active funds — but with lower fees.
A second mathematical necessity is that we cannot have all-passive management. No shares would change hands. Attempts to use markets to allocate capital well would collapse. The stock market would cease to be a market.
Neither proposition is contestable. It makes sense for any given investor to use passive funds and reduce the fees paid to the investment industry; but passive management can go too far.
The debate often degenerates into a rather sterile back and forth between the safety of two unarguably correct positions, like a baseline rally in tennis.
And then, an argument for the potential of (and need for further study of) "peak passivity":
There are far more indices than stocks, and so each stock is a member of many different indices. Using the Bloomberg database, Mr Deluard came up with a number of index memberships for all the 3,000 largest US stocks by market cap. There is a strong correlation between size and index popularity, as bigger stocks are in more indices.
After controlling for the effect of size, he looked at the relationship between the number of index memberships, and valuation compared to earnings, book value and dividends. In the case of book value, the relationship is clear; the more indices of which you are a member, the higher the valuation you achieve on the market. This looks like a passive distortion. The relationship is weaker with other metrics, and the evidence is not conclusive — but it is very suggestive.
When Mr Deluard looked at returns rather than valuations, there was a clear relationship over five years; the more index memberships, the higher returns. But in 2017, even as money flooded into passive funds, the relationship inverted, and stocks least loved by index providers performed better than the rest:
This might just mean that peak passive had been reached, and that active managers who bought stocks that were undervalued because they were unloved by indices did well.
