This is a good sign given that many active managers do not justify the fees and that there has been too much competition for alpha in the past few years.
However, a shift to passive investment may have unintended consequences. First, we are likely to see more correlated moves, as passive investing strategies move in coordination. This will likely result in temporary shocks and shifts in the market. For instance, imagine if all the investment strategies based on certain valuation measure suddenly sold off, this will create a crash in certain stocks and even the market.
Second, passive investment does not utilize all the information. There is much more richer information beyond simple accounting, return, and economic measures. Financial reports, consumer reviews, and all types of news and blogs provide rich information about the firms and the market. Utilizing less information, is likely to decrease the overall efficiency of the markets.
Similarly, passive investments may not capture the shift in the markets. Sometimes there are disruptions in the market such as the tech boom or influx of cash from abroad, such trends may not be processed by passive investments leading to underperformance. For instance, the world may invest in the US due to limited opportunities elsewhere, however, such sudden influx of cash may be thought as overvaluation leading the passive investing to sell, which may lead to missing out an uptrend.
Hence, although we welcome the shift to the passive investment, it is important to acknowledge that there is a trade-off between fees saved and increased performance vs. increased correlation between stocks and less efficient markets due to lower usage of information.
PS
However, I am confident that the market in the long term will correct itself and achieve the optimal mix of active vs. passive investing.
*From Snapshot Seregneti
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