Thread by @davidfickling

One thing to bear in mind about this passing of the baton from active to passive funds is that the distinction is a lot fuzzier than you'd think.

More than 60% of ETF investment, for instance, is by institutional investors:

wsj.com/articles/index…

They're not (necessarily) just "buying the index". Usually they'll hold a portfolio of ETFs the way you might hold a portfolio of stocks and actively manage that portfolio, but a lot of this activity shows up as "passive funds".

Likewise, of course, there's lots of active managers who are basically holding the top-weighted index stocks with a bit of their own special sauce on the side. Which isn't quite passive investment but shades in that direction.

"Passive funds are eating active managers' lunch!" is catnip for consumers of financial journalism, of course, but I've been hearing this for a decade now and active managers are still doing OK.

I think the story is compelling because if retail investors were professional investors they'd be immediate converts to the "risk-adjusted returns of active management are terrible" school and switch en masse to passive. This is understandably alarming to active managers.

But in fact investors in retail funds are rather inattentive about fees and performance, which has always been, and continues to be, most of the game with the investment management industry.

It's true that average fees have been falling, but that's largely because passive strategies are gaining share, rather than because active managers are cutting their fees.

And meanwhile assets under management are rising *much faster* than fees are falling so revenues are 📈

Revenues are up 38% from 2012 to 2017! If that's an industry in crisis, I can't imagine what a boom looks like.

google.com/url?sa=t&sourc…