Active vs. Passive Investing

Are you good enough at picking stocks to beat the market? Not too many people would claim that. Is your asset manager good enough? The $10 trillion invested in active-management funds is a bet that the answer is yes. But more and more people are saying no. So is the world’s largest asset manager, BlackRock Inc., which is paring back its active-equities group. BlackRock is responding to a surge of money into what’s known as passive investing. It’s an approach endorsed by legendary investor Warren Buffett, who thinks the smartest thing your money can do is climb into a hammock and take the rest of the day off. The active vs. passive debate is upending the investment industry.

A little more than a third of all assets in the U.S. are in passive funds, up from about a fifth a decade ago. In the first half of 2017, flows out of active and into passive funds reached nearly $500 billion. The biggest winners have been BlackRock and Vanguard Group Inc., whose founder, John C. Bogle, created the first index fund for retail investors. Some companies that specialize in active management, like Fidelity Investments and Franklin Resources Inc., both of which have seen investors leave, are slimming down. Others are merging or even closing. The trend toward passive has drawn in not only individual investors but institutions and even a lot of financial advisers. At Vanguard, more new cash now comes in via advisers than directly from individuals or retirement plans. Passive investments are also threatening hedge funds, which have drawn fire for poor performance and high fees. Buffett has estimated that investors wasted more than $100 billion on high-fee Wall Street money managers over the past 10 years. Not all active managers are pulling back, however: T. Rowe Price Group Inc. is adding data scientists to supplement the fundamental research it has relied on since 1937. In Europe, passive investing’s market share has doubled over the past decade, but to only 15 percent, with the rise primarily driven by institutional investors, according to Morningstar Inc.