The growing popularity of passive investments makes active management harder, according to a fresh report.
Analysis from financial services firm Credit Suisse pointed out that the rise of passive investments can appear to make it more straightforward for active managers to outpace the markets.
One manager of this view is Alex Wright, who runs Fidelity’s £2.9bn Special Situations fund, and who recently argued the amount of money piling into passive strategies is good news for investors of actively-managed funds because it can make the markets “dumber”.
However, the Credit Suisse report argued investors who are moving their funds to passive vehicles - and so who are not on the other side of active trades - are relatively unsophisticated, meaning the average skill for the remaining active managers is rising, making it more difficult to beat the market.
The report, which looked at how passive investing shapes active management, stated: “Alpha is a zero-sum game, and fewer weak players means it is harder to find a corresponding loser if you intend to win.”
The report noted that small and unsophisticated investors should build passive portfolios with an emphasis on asset allocation and low costs.
Sophisticated investors should seek active managers in asset classes with high dispersion, it stated.
Over the past decade, investors have ploughed $1.2trn (£1trn) into passive investments and pulled $800bn (£645bn) from active funds.
Michael Mauboussin, the head of global financial strategies at Credit Suisse, warned: “Whenever the market forms a strong consensus, caution is in order.”
He said those investors who are shifting from active to passive are less informed, which he compared to weak players leaving the poker table.
"Since the winners need losers, this can make the market even more efficient, and hence less attractive, for those who remain."
But the report was positive about the active industry, saying passive investors rely on their understanding of whether markets are over or undervalued.
“Research shows that money managers who take a long view and are truly active can deliver excess returns,” Mr Mauboussin said.
“It is essential to identify a repeatable source of edge, and to align the investment process to capture that edge.”