As indexing grows, active stock pickers are underperforming the market by increasingly large margins, even as their skill improves. In this episode, we explore why this is happening and consider whether active managers can outperform again. Finally, we explain how to position your portfolio using index funds and ETFs without overweighting the S&P 500 Index.
Topics covered include:
- Why active fund managers keep underperforming
- Michael Mauboussin’s paradox of skill in investing
- How much of the stock market do index funds own?
- William Sharpe’s arithmetic of active management
- Why index funds still have to trade
- Active vs. passive: stock pickers are lagging more than ever
- How index fund flows hurt active managers (Unterberg study)
- Example: how $100 of fund flows moves stock prices
- Who buys the stocks active managers sell?
- Do fund managers sell their best ideas during outflows?
- Who sells shares to index funds? Companies and insiders
- Will active management outperform again?
- Will retiring baby boomers crash the stock market? 19:38 How to invest when index funds drive stock prices
Show Notes
Sharpening the Arithmetic of Active Management by Lasse Heje Pedersen—SSRN
We Now Know Who Really Benefited from the Index Revolution by Aaron Brown—Bloomberg
The Investing Mind by Michael J. Mauboussin—Harriman House
Who Clears the Market When Passive Investors Trade? by Marco Sammon and John J. Shim—SSRN
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546: Do Retiring Baby Boomers Actually Move Markets? And How Much Do Demographics Really Matter
Transcript
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