Comments on: Equities: The shift from active to passive

By: HowardRoarke

HowardRoarke — Mon, 06 Sep 2010 13:20:04 +0000

Mr. Salmon,

The overall AUM at Dimensional as of June 30, 2010 was over $160 billion. This can be verified at its public website: http://www.dfaus.com

All of the equities included in that amount are invested in a passive manner.

Dimensional is an institutional-only investment firm and did not break out the amount of the overall number above that was invested in non-US assets on its public access website (i.e., the $97 billion). However, you should be able to verify it by contacting Dimensional.

However, I do need to make one correction in my earlier post. While none of Dimensional’s offerings are ETFs, it does provide its investments in vehicles other than “mutual funds.” For example, I believe it offers collective trusts and mutual-fund-like-vehicles in other countries. The main point I was trying to make was that none of these investments are structured as ETFs.

By: FelixSalmon

FelixSalmon — Mon, 06 Sep 2010 01:03:26 +0000

Howard, do you have a source for that?

By: HowardRoarke

HowardRoarke — Sun, 05 Sep 2010 18:16:05 +0000

With no disrespect, when you say, “just $97 billion in international indexed mutual funds.” you woefully understate the amount that’s passively invested in non-US mutual funds.

Dimensional Fund Advisors, a global provider of passive mutual funds, alone, has over $70 billion invested in mutual funds, as opposes to ETFs, in non-US developed & emerging markets, all passively.

By: Jamie799

Jamie799 — Wed, 01 Sep 2010 21:52:01 +0000

Helpful post Felix – thanks. Does anyone have tips on how to get cheap passive equity exposure in the UK? We don’t yet have free online brokerage accounts (ii comes close) and TERs for basic FTSE products look outrageous compared to the US, and even more so for bond or foreign ETFs.

By: TFF

TFF — Wed, 01 Sep 2010 16:11:49 +0000

I suspect there are a small number of professionals who have the insight and discernment to consistently beat the market, however their rewards are far greater working at an investment desk or hedge fund than running a mutual fund. This is especially true because mutual fund investors punish a fund that underperforms its peers far more than they reward one that overperforms. The safest and most lucrative path is to simply track the market with 90% of the portfolio and play small games with the remaining 10%.

The move to ETFs may partly stem from a disillusionment with mediocre money managers, but it also permits active investors greater control in managing their money. If they issue a sell at 10:00 it gets executed at 10:01, instead of six hours (and 600 points drop) later. Finally, the fee structure and freedom from account minimums are attractive.

By: FifthDecade

FifthDecade — Wed, 01 Sep 2010 13:59:15 +0000

@DanHess, I think you assume too great a sense of discernment amongst investors. Retail investors go with what they are sold, usually from their banks, and that usually isn’t what performs best long term; and it’s been said that 80% of professional investors follow what the market is doing anyway. I don’t believe Hedge Funds are any better here either. Humans are humans and boys will be boys, and when their testosterone gets up they still overbuy or oversell depending on whether they are on a run or not.

By: DanHess

DanHess — Wed, 01 Sep 2010 03:07:30 +0000

Unintuitively, the market could actually get ‘smarter’ if it gets more passive. Why? Because the indexed money mimics the cummulative decisions of the active money, and the active money is seeing a ‘selection’ process.

If many mediocre money managers leave or endure forced shrinkage, the active managers that remain will be much more elite and talented. There is a subset of active managers, mostly at hedge funds, who really can beat the market reliably.

By: DanHess

DanHess — Wed, 01 Sep 2010 02:55:55 +0000

Good work and good post, Felix!

By: FifthDecade

FifthDecade — Wed, 01 Sep 2010 02:43:23 +0000

You could also read the figures differently: fewer retail and more institutional investors.

By: CDN_finance

CDN_finance — Tue, 31 Aug 2010 21:54:32 +0000

I think that the more money is in these passive index funds the more volatility we’re gonna see. It’s supply and demand: the supply will be diminished sinced it’s now tied up in more and more passive funds, so any demand spikes will lead to greater variance. And I’m sure that suits day-traders and people that add little value to the economy just fine, but it scares off real investment in the real economy.

By: MattF

MattF — Tue, 31 Aug 2010 21:50:27 +0000

I wonder how much of the ‘passive’ money comes from retirement funds– particularly now that new money in defined contribution plans will generally default to ‘balanced’ funds that invest in varying percentages of bonds and equity index funds.

By: SimonMorris

SimonMorris — Tue, 31 Aug 2010 21:18:40 +0000

“And as correlations rise, of course, it becomes increasingly difficult to justify an active strategy.” I’m not sure that’s right. If you’re looking at correlations of daily returns, don’t forget that they’re noise for long-term investors. As more money in the stock market becomes dumb, there are more rewards for smart money. (Of course, there aren’t any rewards for money that thinks it smart, but isn’t).