News

Passive investing worse than Marxism?

SocialismThe rise of passive asset management threatens to “fundamentally undermine the entire system of capitalism”, according to analysts at US research firm Sanford C. Bernstein & Co.

In a provocatively titled note, ‘The Silent Road to Serfdom: Why Passive Investing is Worse Than Marxism’, the firm says politicians and regulators need to be highly wary of the rise of passive investing, and cognisant of the “vital importance” of active management to the wider economy.

"A supposedly capitalist economy where the only investment is passive is worse than either a centrally planned economy or an economy with active market led capital management," the note says.

“In a Marxist society, at least someone is doing the planning of capital allocation – in a predominantly passive market the capital allocation process is done by a marginal participant.”

The firm is concerned that the media and analysts are increasingly pushing investors towards low-cost tracker funds, without taking into account the potential risks of a purely, or predominantly, passive asset management market. It states that the rise of indexing means stocks are tending to move in the same direction more often. The alleged upshot of this is the correlation of stock price increases, impeding the efficient allocation of capital.

Bernstein’s note advises lawmakers and regulators to consider the broader benefits of a functioning active asset management industry to society, and ensure policy initiatives do not explicitly undermine active management.

Reaction to the note has been mixed.

Robin Powell, who writes a blog called Evidence Investor, said fears of a purely passive market in years to come are significantly exaggerated. He noted that while there has been a significant shift towards passively managed vehicles in the US in recent years, passive funds still account for only a modest proportion of total investable assets.

“Almost everywhere else in the world indexing has barely scratched the surface. It’s taken more than 40 years for passive to reach the point it has in the States, and it won’t achieve worldwide domination overnight,” he said.

“It’s extraordinary that an industry that has effectively imposed a stealth tax on investors for decades is now being presented as the bastion of a vibrant economy. In allowing ordinary people to keep a bigger share of their investment returns for themselves, passive investing serves a far greater social and economic purpose than professional stockpicking ever did.”

Craig Lazzara, global head of index investment strategy at S&P Dow Jones Indices, asked where passive assets were flowing from.

“If you believe some active managers are more skillful than others, and their skill is manifested in outperformance, then presumably it must be the least skillful active managers who lose the most assets.  In that case, the existence of a passive alternative raises the quality of the surviving active managers, and thus contributes to market efficiency,” he said.

Conversely, Wesley Gray, chief investment officer of Alpha Architect, an exchange-traded fund firm, said the note was a “timely warning”.

“Lower costs and easier access to more investment options may encourage excess trading and performance-chasing. As yet, the benefits of passive vehicles are not entirely clear,” he said.

©2016 funds europe

Thought leadership

AXA_IM_native_image

What should investors expect in 2024?

For the year ahead we expect lower growth, lower inflation and limited interest rate easing. Find out more in AXA IM’s Outlook 2024.

DOWNLOAD THE FULL OUTLOOK »
Ocorian switching admins native

Why are managers switching fund administrator?

13% of alternative fund managers are looking to switch their fund administrator over the next 18 months. Find out why.

DOWNLOAD NOW »

Euroclear_PM_white_paper_native_image_400x103

This whitepaper outlines key challenges impeding the growth of private markets and explores how technological innovation, when bolstered by the operational experience and global reach of FMIs, can provide solutions to unlock access to private market funds for a growing investor base.

DOWNLOAD NOW »
UBS_commodities_native_image_Nov_2023

Transporting goods by sea is the lowest carbon way of transporting goods. That said, the shipping sector contribute 3% of global carbon emissions, so we need it to get to net zero. Breakthrough technologies have the power to reshape the industry and drastically reduce its environmental footprint.

LEARN MORE »

Executive Video Interviews

Why fund admin tech is a key competitive advantage

Cian Hyland, Strategic Client Relationship Director at Deep Pool Financial Solutions spoke to us about how technology enables efficient data management, reporting automation and secure data access.

Insights from State Street

Cuan Coulter, Global Head of Asset Managers and Head of UK and Ireland at State Street, discusses how fund managers decide between the two cross-border fund domiciles, namely Ireland and Luxembourg, and why asset managers find managing data so difficult.

Unlocking access to private markets

Vincent Clause, who heads the global funds strategy at Euroclear and David Genn, CEO of Goji, sit down with Funds Europe to explain how technological innovation, bolstered by operational experience and global reach, can provide solutions that unlock access to private markets.

Sustainable investing in the DC world

Claire Felgate, a specialist in UK defined contribution pension schemes at asset manager BlackRock, talks with Funds Europe editor Nick Fitzpatrick about how - and the pace at which - DC pension schemes are adapting to the requirements of sustainable investment.

arrows

Webinars

Watch our webinar for a deep dive into the findings of the fresh-off-the-press EU Taxonomy 2023 Insights Report, based on Clarity AI's best-in-class coverage of EU Taxonomy reported data and CDP industry-leading environmental datasets. 

In this webinar, we discuss tools for optimising fund data management and distribution, the role of global fund classifications and ratings, and how technology and automation enhance data integrity and insights.