In “Epic” Industry Shift, Passive Funds Are Now Bigger Than Active

In “Epic” Industry Shift, Passive Funds Are Now Bigger Than Active

Several weeks ago, Bank of America predicted that if one extrapolates the existing trends in growing passive funds and shrinking active funds, the D-day when robots and ETFs overtake humans in asset allocation will take place some time in 2022.

In retrospect, Bank of America was wrong, because as Bloomberg just reported, this much anticipated “epic industry shift” in the $8 trillion stock-fund industry has just taken place, with the balance of power officially shifting away from humans.

Citing preliminary estimates released fromĀ Morningstar, Bloomberg reports that assets in “passive” mutual funds and exchange-traded funds tracking U.S. equity indexes surpassed those run by “active” stock-pickers for the first time last month.

Following the August flurry of fund outflows from active and inflows into passive funds, assets in equity index-tracking U.S. funds rose to $4.271 trillion, for the first time ever surpassing the $4.246 trillion run by stock-pickers. Specifically, investors added $88.9 billion to passive U.S. stock funds while pulling $124.1 billion from active managers this year through August, the Chicago-based firm estimated.

The inflection point, decades in the making, underscores changes upending a business built on the idea of pros getting paid to outsmart the masses.

And now that D-day for investors has come, the scramble by passive funds to attract even more investors (the only way this business makes sense at far lower margins is with volume and market share) will mean even lower asset management prices, and an even faster rotation out of active, as the market rapidly approaches the singularity that Michael Burry is now obsessed by: a world in which the passive investing bubble finally bursts, but not before markets become woefully inefficient and disconnected from fundamentals – as a reminder, index buying does not discriminate on a fundamental basis and does not reflect all new information available about the company, but merely rewards asset simply due to their presence in one index or another. Thus, in a feedback loop, the more popular and powerful passive investing becomes, the less relevant it will makes active investing, which will lead to even greater outflows from active and into passive.

The culprit behind all of this? Why the Fed of course, which over the past decade has become an activist central bank which has made any material market corrections impossible, thereby robbing – literally – active investors of their bread and butter: reward for getting the downside right, in addition to getting the upside.

There is some hope for humans yet: in international stock funds, active funds still surpass passive, but the gap is narrowing.

Actually, scratch that – none other than America’s most important banker, Jamie Dimon, speaking at an industry conference yesterday, made it clear what the future is for financial professionals: “The battle is more in the tech world at this point than in having brilliant traders.”

That’s all one needs to know.


Tyler Durden

Wed, 09/11/2019 – 18:45