Report dubs passive investing ‘worse than Marxism’
The rise of passive investments is “worse than Marxism” from a capital allocation perspective, according to analysts at Bernstein who say they see no indication that the strategies are peaking in popularity.
Describing passives as “a hugely beneficial development in lowering the cost of investing”, Bernstein analyst Inigo Fraser-Jenkins and team nonetheless warned the investments’ popularity risked harming the way in which capital flows through to the broader economy.
The report, ‘The Road to Serfdom: Why Passive Investing is Worse than Marxism’, said an active approach to capital allocation, backing a variety of companies rather than simply those with the largest market capitalisations, was preferable for a well-functioning society.
“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 analysts said.
“Given that Western economies have entrusted capital allocation to the market the implicit abrogation of that responsibility through the rise of passive management, without the establishment of an alternative mechanism for capital allocation, is an insidious problem.”
The Bernstein team also highlighted the threats that passives may pose to financial stability, for instance by increasing correlations between stocks and therefore harming market liquidity.
As a result, there is reason to think policymakers are mistaken in viewing passives’ rise as a benign phenomenon, according to a report published at a time when the products’ share of global assets under management has risen from 25 per cent to 34 per cent over the past five years.
A further 30 per cent growth in the passive market over the next five years would see developed market stock correlations rise by about 15 percentage points even in normal trading conditions, Mr Fraser-Jenkins and team said.
They added suggestions that passives’ rise could create inefficiencies which active managers are more easily able to exploit are wide of the mark.
“We are very sceptical of such claims and think they are wishful thinking of the part of active managers.”
Nor is there likely to be a shift back towards active management, according to the analysts, who predicted passives are “nowhere near” reaching their peak market share.
Bernstein did provide some hope for active managers. The report concluded that its assertions meant policymakers’ focus on issues such as active fund fees or closet tracking may prove misguided.
“We do not for a moment suggest that policymakers should consider limiting passive in any way. [But] they may wish to consider the broader benefits of a functioning active asset management industry to society as a whole so that when policy initiatives are undertaken they do not explicitly undermine active management.”
