We all hear about the massive move away from active to passive in the US market. We also hear arguments that passive may eat the world and that active management is a zero sum game (seems like a reasonable hypothesis, but I’m not so sure).
Here is a figure from a recent CS report that highlights the US activity and the clear move away from active and into passive:
Active vs Passive
All of this chatter seems viable from a US-based perspective.
David Einhorn's Greenlight Capital returned -2.9% in the second quarter of 2021 compared to 8.5% for the S&P 500. According to a copy of the fund's letter, which ValueWalk has reviewed, longs contributed 5.2% in the quarter while short positions detracted 4.6%. Q2 2021 hedge fund letters, conferences and more Macro positions detracted 3.3% from Read More
Interestingly enough, you don’t have to look that far to see a completely different narrative playing out. When we look North to Canada and we see an entirely different game playing out:
The Canadian market highlights a completely different story — a move towards more active and a move away from the tiny amount of passive already in place.
Here is a comparison chart of the move to passive between the US and Canadian markets:
What is going on?
The real answer is “who knows,” but the Morningstar Canadian crew has an answer:
Big banks, incentives, and backward self-regulation are to blame.
Incentives certainly play a role. Perhaps recent past performance also plays role? Maybe even culture?
My takeaway is that the narrative claiming that passive is going to destroy and/or eat the financial world is too simplistic. There are a lot of mechanisms at work in the financial marketplace and their interaction effects are extremely hard to predict. I don’t have the answers and I can’t predict the future, but it will sure be fun to see how it all plays out!
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Article by Wesley R. Gray, Ph.D. – Alpha Architect