Royal London Asset Management  

RLAM warns of risks in passive investment dominance

RLAM warns of risks in passive investment dominance

Royal London Asset Management has warned about the risks to investors if passive investing was to become the dominant choice.

The asset manager warned of reduced choice for investors and an over-reliance on the stock market should people continue to opt for passives at the rate they currently do.

Since the 2008 financial crash, trillions from active investments have gone into passive investing, according to RLAM.

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As a result of this, passive investing in shares now accounts for almost half of all assets under management, the firm said.

RLAM suggested the increase of passive investing could be driven by lower cost and by the failure of some active investments to outperform the market.

Piers Hillier, chief investment officer at Royal London Asset Management, said: "There would be dangers both to individuals and to the economy if the benefits of active management were to be lost completely and the dash for passive investment continued unabated.

"Individuals would have less choice and would be forced to follow the ups and downs of the stock market, whilst business start-ups would find it harder to raise money."

The firm said research has shown that if passive investing becomes dominant, individual investors would be less able to diversify by investing outside the index.

This could see a greater volatility in their investments, especially as shares within an index have a tendency to move in tandem with each other, it said.

Jason Hollands, managing director at Tilney Investment, said the current rate of growth of passive investing was likely to slow down after it hit "saturation point".

He said: "There has certainly been a major structural shift away from actively managed funds into passive investments – though estimates of the extent of passive ownership vary.

"However, it would be naïve to expect this growth to continue relentlessly and it will therefore reach a natural saturation point."

He added: "Passive investing certainly has a role within a portfolio and at points in the cycle but it is not a catch-all panacea."

Mr Hollands warned investors pursuing a wholly passive approach would be fully exposed to market downside when markets enter tougher times, as they have built up exposure to those parts of the market "where valuation bubbles have emerged".

He continued: "It is also important to understand that inherently there has to be a natural equilibrium between passive and active investing [...] if everyone invested passively, then no one would be actively be trying to distinguish between 'good' or 'bad' companies and the markets would cease to function efficiently as a source of new capital."