The passive investing bubble is causing mid-sized active management firms to wither.

Active Management is Dying in the Passive Investing Bubble

The passive investing bubble chronicles continue, leaving more wreckage in their unrelenting march: Writing in The Financial Times Unhedged column, Robert Armstrong discusses the plight of mid-sized active management firms. Not surprisingly in an era where it seems every investor is flocking to passive investment strategies, he questions the purpose and sustainability of writing his column in the FT.

Another notable point in his piece is the incredible outflows from actively managed firms. T Rowe Price, Franklin Resources, Abrdn (not a typo, formerly Standard Life Aberdeen plc), Janus Henderson and Invesco have been hemorrhaging money to the tune of $600 billion since 2018 — just from those five firms alone. If the stock market had not been strong during this period, the damage would have been worse, because rising stock prices helped save some of their assets under management.

Scale is such an import factor in the modern asset management business, so the big get bigger and the mid to small-sized firms die off. This is creating an industry of gigantic, too-big-to-fail asset management firms that are all investing in essentially the same stocks in the same percentages

While active management shows no signs of rebounding soon, the fragility of the passive investing ensures that something else will take the place of the current regime in the years ahead, but the timing of that dramatic change is very uncertain.

Since the passive investing bubble is fueled by flows, a possible U.S. recession could trigger outflows from passive funds, due to mass layoffs. Job losses would prevent individuals from contributing to 401(k) accounts that are automatically invested in passive funds each pay period. Additionally, hardship withdrawals from retirement accounts could induce further outflows.

Judging by leading indicators in the economic cycle and analysis by of firms like ECRI, we may be entering into a period of unique vulnerability for passive index funds if the job market turns down. The next 6 to 9 months could be very eventful.

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