Passive investing has changed the game for asset managers and investors, who are increasingly shifting toward low-cost strategies in the equity market. And according to Jack Bogle, founder of Vanguard and pioneer of index-based investing, the approach will become even more dominant.
“As a long-term investment strategy, I don’t think the index fund has any competition at all,” Bogle said to an audience at Cornell University’s Ivy League clubhouse, reported the Financial Times.
Currently, passive strategies account for 47% of assets managed by the US fund industry. But according to Bogle, they could go up to 90% without triggering the efficiencies of the market. “[T]here will always … be people looking for values, price discovery and all that kind of thing,” he said.
Earlier this year, Bernstein analysts said that passive equity management should overtake funds run by active managers by January. However, active stock-pickers have staged a comeback after last year’s lacklustre performance, with data from S&P Dow Jones Indices showing that nearly 57% of large-cap US equity fund managers beat the S&P 500 over the past year.
Even barring a revival in the active industry, Bogle said there are threats from the increasing growth of passives. He said Vanguard, which now manages about US$4.7 trillion in assets and is second only to BlackRock, is growing too large. “Running a large company is a very difficult thing … It gets harder and harder as you get bigger and bigger,” he said.
He also expressed concerns about high concentrations on liquidity and marketability of some Vanguard funds, particularly ones in the US$3.8-trillion municipal-bond market. Morningstar data indicates that 60% of the US$323 billion invested in taxable bond funds over the past year has gone to passive funds.
And while he did not believe it was fair to classify the largest fund managers as systematically important financial institutions, he pointed to a “significant” risk from possible regulation.
“We run basically an old oligopoly, Vanguard, BlackRock and State Street,” he said. “An oligopoly is not necessarily bad but it is subject to challenge by regulators, and particularly European regulators … It’s hard to predict where that might go.”
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