Challenges posed by the rise of passive investing

THE swift rise of passive investing has been one of the more prominent features of capital markets over the past 20 years. Spectacular though the growth may have been, it has not come without hidden costs.

For example, if more people are investing in buy-and-hold instruments, has liquidity suffered and if so, what does this mean for market efficiency? Furthermore, what consequence does increasing passive ownership hold for corporate governance?

In June, Morningstar reported that the US has seen an enormous shift in the market away from active funds to passive investments in the past 20 years, mainly due to the “infamously-low success rate of active managers within the US equity field”, while in Europe, passive investing remains popular, with appetite for long-term funds growing.