Passive investment is a reasonably simple process that generates more than its fair share of bellyaching. Users love it. Rather than poring over spreadsheets to try to beat the broader market, investors from have-a-go punters to big institutions can buy dirt-cheap exchange-listed market trackers and save the bother.
Fund managers are generally not so keen, blaming passive investment’s rise and rise over the past 40 years for the fee war stalking the asset management industry. But this is not the only reason why the shift gets under their skin. Instead, they say it forces the stock market to move in mysterious ways and complicates the noble art of successful investing. This may sound like a lame excuse for running a portfolio badly, but it does seem to stack up. Indeed the issue is increasingly pressing.
The latest data from Morningstar, a funds monitoring company, showed that in December, the net assets in passive funds exceeded those in their active cousins for the first time ever. The demand for US mutual funds and exchange traded funds in 2023 was rather weak. A net $79bn flowed in, a massive rebound from a grim 2022. But it was the second-lowest organic growth rate in the data set going back to 1993.