Value Investing

The End Of Indexing? Six Trends That Threaten Passive Investing

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The following is excerpted from the book, The End of Indexing?, which is available from the link on this page.

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“I guess I should warn you, if I turn out to be particularly clear, you've probably misunderstood what I've said”. Alan Greenspan.

Index-tracking is undoubtedly the flavor of the day. Its share of total dollar volume is now in the neighbourhood of one-third of the total U.S. mutual fund market – a market share that continues to grow almost exponentially, and informed sources expect index-tracking mutual funds to have captured more than half of total funds under management within a handful of years1.

With that growth rate in mind, why on earth do I believe the end of indexing is nigh? Well, admittedly, the title for this book was chosen to provoke slightly, but only slightly. Of course, I don’t expect index-investing to disappear altogether. For many years to come, index funds will remain part of the menu investors can select from when making their investments; however, I firmly believe investors will soon begin to realise that the investment environment we are entering is entirely unsuitable for index-tracking strategies, and that they will begin to exit what they have all piled into in recent years.

My logic is based on a combination of structural trends that I have identified over the years. I distinguish between shorter-term tactical trends, which are either cyclical or behavioural in nature, and longer-term structural trends.

The former I try to address with the decisions I make virtually every day. Will oil prices be affected by the latest OPEC agreement? Will the U.S. dollar rise despite many investors already being very long USD? Those sorts of questions are tactical in nature and are obviously important; however, they are not the subject of this book, which will focus on the various structural trends that will affect economic growth for many years to come; structural trends that will be almost impossible to avoid.

Let me caveat what is to follow by saying that the six trends below are only the structural mega-trends I have identified. In addition to those mega-trends, there is also a host of structural sub-trends. I will not go into any level of detail in this book when occasionally referring to one of those sub-trends.

I should also point out that I would never claim to have figured it all out. Just because a structural mega-trend is not mentioned in this book, does not at all imply it doesn’t exist. I could quite possibly be guilty of not having spotted it yet.

With that in mind, the six structural mega-trends that I believe will shape our future are:

  1. The end of the debt super-cycle.
  2. The retirement of the baby boomers.
  3. The declining spending power of the middle classes.
  4. The rise of the East.
  5. The death of fossil fuels.
  6. Mean reversion of wealth-to-GDP.

Before I go into a more in-depth discussion about those six trends, I should add a few important points.

Read the full article here by Niels Jensen, Advisor Perspectives