One of the more difficult challenges when consuming financial media is recognizing what is important, actionable or wholly irrelevant. One of the biggest stories over the past decade (or two) has been the rise of the indexing, driven in part by the rising popularity of ETFs. Something we have been harping on pretty much from the outset on this blog.
A couple of years ago I speculated on when the percentage of assets under management that are passively managed exceeds that are actively managed. At the time I thought it might settle in around a 50/50 split, but I hedged my bets:
No one really knows where that maximum point lies. 50/50 seems as good a guess as any. If we recklessly extend the Laffer Curve example then it lies somewhere farther over to the right, i.e. a higher percentage indexed. The point is that contrary to Bill Ackman and others we are not yet to the point where indexing is somehow harming the function of our capital markets.
It’s pretty clear a couple of years later that passively managed assets will soon be the dominant form of asset management. Josh Brown at the Reformed Broker speculates when this occurs it will unleash a flurry of commentary about how computers are taking over, capitalism is doomed, etc. Josh makes that point that is wasted worry. He notes that investors, both large and small, are voting with their feet for low cost, algorithmic asset management:
The real story is that people like things that are computerized, standardized and cheap these days – as opposed to relying on fallible humans, faith in institutions, expensive and prone to random happenstance.
“Passive” and “indexing” and “quantitative” and “rules-based” scratch that itch. And financial intermediaries, the driving force behind fund selection and asset allocation, are here to scratch those itches for their clients.
Investors are doing what is best for them. The democratization of investing through the rise of independent RIAs, index funds, ETFs and low (or no cost) commissions makes it increasingly easy to create portfolio solutions that work for you. Not for some financial intermediary who is selling high cost “solutions.” So tune out the apocalyptic talk and focus on what matters for you, i.e. you do you.