This is an amazing development. The bourse as a capital allocation mechanism is losing its traditional function. Those putting their savings - like me - in an index fund, are uninterested in the success or failure of companies. They arrived to the conclusion that betting on the most promising firms is impossible, that the average will always be superior to specific bets. This position has important philosophical consequences, and definitely, it is worse that Statist management of the economy. It reveals the absence of intelligent and brave speculators in the stock exchange. They became cowards and mediocrity rules."Passive funds, which include low-cost exchange traded funds (ETFs), today manage an astonishing $8tn of assets, or 20 per cent of all investment fund assets. For equities the figure is higher. In Europe, passives make up 30 per cent of equity fund assets; in the US the figure is 43 per cent.
Passive funds have slashed investing costs for investors. Yet one outstanding question is what they mean for the allocation of capital. Two years ago Bernstein Research described passive investing as “worse than Marxism” because of its indifferent approach to capital allocation.
The theory goes that passives, which mainly allocate funds to follow market capitalisation-weighted indexes, are typically backward looking. Therefore the biggest company today will remain the biggest company tomorrow, and capital will therefore be allocated by size, not future productivity." From the Financial Times.
