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Editor’s note: Why an all-passive world will never materialise

Passive investing now accounts for nearly half of all global assets under management. Fifteen years ago, that was close to zero. It’s clear where the flows have come from as well: out of active funds, as we have become accustomed to keeping a closer eye on value for money from those we trust with our savings.

Some of this scrutiny is deserved. As the FCA’s recent asset management market study shows, there are still too many funds out there charging too much and delivering too little. Plenty are doing nothing more than mirroring the same index as their – significantly cheaper – passive cousins.

Our cover story this week looks at what would happen if that trend towards passive use continued.

Regardless of one’s view on which investment strategy is best, predictions we will soon see a world completely dominated by passives are highly unlikely to materialise. To put things bluntly, active management makes far too much money for that to happen.

Cover story: What would an-all passive world really look like?

Equally important, it is near enough impossible to convince the average consumer that there is no such thing as a genius investor. It’s just so much easier to believe skill determines investment outcomes than the concept that, in fact, no one has any idea what’s going on, and that sheer luck or the throw of a dart would have just as likely given you the same returns.

Human psychology ignores survivorship bias in active fund managers; that we only see the star investors and not the myriad that fall by the wayside in the process.

Right-leaning folk who believe in perfect markets will always conveniently forget that the only way you could possibly achieve outperformance would be by having access to some unique or privileged information asymmetry, despite the fact plenty of managers research off the same company accounts, articles and analyst notes.

Given how unpredictable markets have been since the crash, there is something to be said for the notion that the best model to understand them is still random walk.

Fortunately, advisers who have made the move more towards holistic planning rather than pure investment advice have another string to their bow. One that can’t possibly be replaced by luck: the skill of navigating a client’s whole financial life towards their true aims and objectives.

Finally, a quick note on last week’s cover story, which included references to Briggs Murray Financial Planning & Wealth Management and Henderson Carter. To clarify, after leaving Henderson Carter and prior to joining Briggs Murray, the adviser worked for three companies, and did not directly take up a role with Briggs Murray upon leaving Henderson Carter. They were employed at Henderson Carter for a period of one month and left in November 2013. We apologise for any unintended inferences made and for any confusion caused.

Justin Cash is editor of Money Marketing. Follow him on Twitter @Justin_Cash_1

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There are 2 comments at the moment, we would love to hear your opinion too.

  1. The irony is that much of what active managers do drives the performance of passives as they look to allocate capital where it is most deserved…the passives then lock into batches of the top performers/biggest (ie the FTSE 100) The main reason that passives cannot be allowed to take over the world is that it would mean capital flowing without consideration of the likely winners and losers, merely following the passive formula. This already happens to some extent with index trackers but is largely negated over time as capital flows to new joiners on their way up

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