Economic guru Jack Bogle predicts that passive investing could eventually account for 90 percent of the equity market.
The Financial Times explained that “passive” investment of stocks through mutual or exchange traded funds that simply track an index — and charge investors much smaller fees — accounts for 47 percent of the assets managed by the US fund industry, posing a severe challenge to active managers who take higher fees with the promise of beating the returns of major indices.
“As a long-term investment strategy, I don’t think the index fund has any competition at all,” the FT cited Bogle as telling an audience at the Ivy League clubhouse for Cornell University in Manhattan.
Passive investing is commonly defined as an investment strategy that aims to maximize returns over the long run by keeping the amount of buying and selling to a minimum. The idea is to avoid the fees and the drag on performance that potentially occur from frequent trading.
“There must be some limit somewhere with how much indexing there can be without [reducing] the efficiencies of the market,” he said. “[But] if I had to guess, I’d put [the limit] in the area of 70 or 80 or 90 percent — very large — because there will always . . . be people looking for values, price discovery and all that kind of thing.”
However, not all respected economic gurus agree with Bogle.
“Passive investing is in danger of devouring capitalism,” billionaire Paul Singer wrote in his firm’s second-quarter letter dated July 27. “What may have been a clever idea in its infancy has grown into a blob which is destructive to the growth-creating and consensus-building prospects of free market capitalism,” Bloomberg quoted Singer as saying.
Almost $500 billion flowed from active to passive funds in the first half of 2017. The founder of Elliott Management Corp. contends that passive strategies, which buy a variety of securities to match the overall performance of an index, aren’t truly "investing" and that index fund providers don’t have incentive to push companies to change for the better and create shareholder value.
(Newsmax wire services contributed to this report).
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