This is quite a good advice, while crossing a railway, always to check for the train coming the other way, hidden by the first one. You know those kinds of signs that say: “Look the other way or you risk death and a $20 fine”.
Well this reminds me very much of the current situation of asset management. They are so deeply obsessed with the disruption train that they see, that they are not watching for the bigger, hidden train coming the other way.
This is a very depressing time for active fund managers, as the attack of passive asset management is brutal, flanking them from both an aggressive media coverage and strong cash outflows. Who indeed could have predicted that John Bogle, yes John Bogle Vanguard’s founder, would become such a rock-star today! His pictures and quotes are just all over my tweeter feed. And it is not going away soon…
And cash inflows/outflows are just even more worrying for them. As more than 30% of US assets under management were passively managed at year end 2016, and a clear momentum for a continued increase in 2017 dawns, traditional asset managers can actually start to be scared, at least. With good reasons to !
However, the current never ending beating up of active management became that strong and mainstream, while the answer given by active managers that shaky, that we could rightfully wonder if this is not getting a bit too far. Well, of course I must confess that I am among the first ones to give them a friendly slug when I can, sorry about that, but I also consider that they might need a helping hand guiding them out of this. There are some limits to plain criticism and being more constructive is possible.
This post was originaly published in French on the website quantalys.com as an answer to Philippe Maupas’s posts on the subject.
Hello Philippe and thanks for you post.
Two points drew my attention while reading your posts. First of all, it is clear in the various studies presented that costs still constitutes the best leading indicator of future performance, may they be active or passive.
No surprise here, this is both intuitive and widely proved. It is still a good thing to remind to investors though.
Then, you raise the possibility that the growth of passive management, very strong for now, might get slowed down by the the upcoming arbitrage opportunities that should logically appear above a certain threshold of assets managed with a passive strategy, strategy which is uncorrelated with underlying economic reality and therefore prone to arbitrage.
But telling at which level this might happen is far from easy. There will be, I agree, a equilibrium level between active and passive asset management, but which one ?