Huskie87 we are in agreement in being doubtful that passive mgt will be unable to absorb jobs losses in active
Investment managers collectively provide negative alpha, whether active or passive*. It is impossible for collective returns to exceed the benchmark. Collective alpha can never be positive. If the average US large cap manager trading S&P 500 stocks charges 1%, then the average net of fee return for an investor is X-1%. Average alpha is -1%. If the average passive fund in this space charges 20bps, then the average passive investor will get X-0.20%. Average alpha is -0.20%. Collectively, both produce negative alpha, active managers just underperform passive considerably.
*passive managers actually engage in securities lending, which quite often mitigates most or all of their small management fee. VOO for example, has only trailed the S&P 500 index by 0.04% per year over the past 15 years. You’ll note that their underperformance is smaller than their management fee, as a result of securities lending (thank you active investors). The management fee on this fund is now 0.05%, but has come down over this time period as size has allowed them to grow more efficient and spread internal operating costs.
This would be correct if we were losing great market participants who were adding value to the price discovery process. If great minds give up on trying to participate in price discovery, then the collective group becomes less intelligent. On the other hand, if the least qualified leave the group, the collective group becomes more intelligent, more disciplined, less prone to emotional reactions. The shift from active to passive that is occurring, and will continue to occur, involves people with zero ability to determine fair value. Their absence from the market does not make it less efficient.
Of course, the market can reach a point where there are too few participants, and then yes, the market can become more inefficient as participants leave. Right now actively managed mutual funds make up 77% of the publicly traded mutual fund market. There are over 21,000 active mutual funds. That’s nearly double the number of publicly traded stocks… There are something like 20,000 hedge funds. We are not in a situation in which price setting participants are a rare commodity…if half of these people went away, ideally the least qualified, we would not see prices become less efficient.
This is dumb.
Care to share why