Is There A Cap To Passive Investing’s Market Cap?

During the last week of 2017, institutional investors became minor net sellers of stocks, a Bank of America Merrill Lynch report on Equity Client Flow Trends shows. The short term investing trends of BAML customers who participated in the survey, while taken during a traditionally slow week for institutional investors, nonetheless mirror larger trends, particularly with regards to the Active equity fund versus / passive index investing.

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Can active equity fund managers “beat the market” during the quantitative easing era?

Perhaps the trend most radically defining the world of a meaningful segment of professional investors, active managers, has been the trend away from picking individual stocks in hopes of “beating the market.”

A Morningstar active vs passive “barometer” shows that of late, less than half of active stock managers beat their passive benchmark.

Active managers have, during certain market environments and under idiosyncratic conditions, outperformed general stock benchmarks. During the era of quantitative easing, when markets have generally risen in response to both macro simulative injections as well as idiosyncratic company news, stock picking has been widely noted as being challenged.

This battle between passive and active investing can be seen in BAML’s report, which shows institutional managers selling individual named stocks and buying ETFs. ETF inflows, in particular, have been a consistent trend, showing up in the last eight weeks of the BAML study as well as on longer time horizons in numerous studies.

Does passive investing have a ceiling at 40%?