A tipping point for passive investing?

We’ve witnessed the rise in popularity of so-called “passive” investing in recent years, and the debate between passive versus active isn’t set to end anytime soon. However, ETFs and index funds are set for a milestone of sorts next year, as they’ll hold 50 percent of assets in 2019 if current trends hold, according to Morningstar. Currently, 48 percent of assets are passively managed.

"I'd expect the trend from active to passive to continue," Benjamin Phillips, a consultant with Casey Quirk, told Investment News in an article published this week. "It's not simply investors grabbing the tail of the bull — it's a secular shift in how advisers are building portfolios.”

Meanwhile, an excerpt from a recently issued study by AQR entitled The Illusion of Active Fixed Income Alpha, which we read over the holidays, had this to say: “Our analysis finds that passive exposures to traditional risk premia — primarily term risk, corporate credit risk, emerging markets risk, and volatility risk — explain a majority of FI manager active returns. There is largely no outperformance at the category level after controlling for exposures to well-known traditional risk premia. The implication for asset owners is clear: Traditional discretionary active FI strategies offer little in the way of true alpha.”

We suspect that champions of active investing in fixed income will take exception to AQR’s analysis, and we look forward to continuing to monitor this debate as it unfolds.

This article was published as part of Weekly Briefing No. 155