The market is not directing cash into passive investment. Many investors may not appreciate that the longest bull market in history has not generated very much extra money for US equities. What is happening is analogous to active-investment cars being swapped for a seat on the passive-investment bus.
A zoomed-out view of the yearly inflows of capital into passive US equity funds versus yearly returns of the S&P 500TR index illustrates little or no connection between the two. That relationship suggests that market returns are not dictating the increase in capital flows, nor the pace of that increase. A more detailed look at the same inflows on a monthly basis shows a similar lack of connection. Even at a stretch, monthly inflows show only a mild relationship to the previous month’s S&P 500TR performance.
So what is causing the shift? There is the underlying assumption that investing now in the market index will yield positive returns,but even that does not explain the change which perhaps could be better described as contagion. Inflows into passive strategies provoke further inflows. The contagion is something of a happy coincidence for the promotors of the passive vehicles, considering how dependent on scale they are for their business to be profitable.
Hop On the Driverless Bus
If the only decision to be made is to get a seat on the bus and the fact that the bus is already jam-packed is all the evidence required that you should be on that bus, then some questions are pointless. Where are we going? and Who’s driving? are assigned to the meanderings of the philosophically-minded. By omitting to ask Why we got here? all on board should take comfort from the fact that there are plenty of others on board too. One would not have to be a sage from Omaha (or anywhere else for that matter) to get the tingling feeling that this may not be the best reason to board that bus.
In the world of autonomous vehicles, one might ask is it a problem that there is no driver? As advocates of the use of artificial-intelligence technology in the investment decision-making process, our opinion is that the passive-investment bus is no autonomous vehicle. It is just an old-style bus with no driver.
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