While many managers have relied on the assumption that passive funds will be uncovered in the next big bear market, that hasn’t played out this year, contends an article in the Financial Times. Instead, passive equity and bond funds have seen $379 billion and $178 billion pour in, respectively, while active equity and bond funds have seen outflows of $215 billion and $442 billion, respectively.
Active managers haven’t been living up to their pledge to outperform during market downturns; only 40% of the nearly 4,000 active funds tracked by Morningstar’s Active Passive Barometer outperformed their passive counterparts, while only 29% of active bond funds outperformed their passive peers. And hedge funds aren’t faring much better—the average fund is down 6.66% so far this year. Indeed, 2022 is actually making the case for passive investing instead of tearing it down, the article maintains.
One reason for the solid inflows into passive investing this year could be a purely technical one: many retirement funds have their defaults set to passive investing, so there’s always money coming into the funds from a variety of streams. But beyond that, simple psychology could be another reason: no one likes to feel deceived, the article notes. Telling clients that the S&P 500 index will fall 20%, and then having that prediction come to pass, clients won’t be happy, but they’ll accept it, more so than the failure of a promise to protect them during a downturn. The market will eventually slow down in its shift toward passive investing, but when it will actually reverse back to active investing is anyone’s guess.