Fascinating discussion this morning from Robin Powell. He points to a research note from Kings College where the authors surveyed active managers about how they were responding to the shift in favor from active to passive fund management over the past decade or two. But they also asked questions about how these managers invested their own monies.
Robin buries the lede in his discussion, but allow me to correct that oversight:
“Active managers invest their own capital passively.”
Many of the comments from active managers were eye-opening, but none more than “All my own money is in index funds” topped only by “I wouldn’t invest in my own fund.”
The study mostly discusses differences between the bodies of knowledge active and passive investing are based upon; how the incumbent groups of players adapt to new themes and market interest. It is also noteworthy that “the Active investment community in both the UK and the US, [exhibits] defensiveness vis-à-vis the rise of Passive investing.” The researchers describe financial markets as “slowly evolving communities of practice whose habits, routines and ways of knowing can be difficult to shift, even when faced with overwhelming evidence that what they are doing doesn’t work most of the time.”
As Warren Buffett, one of the greatest active investors of all time noted long ago, “A low-cost index fund is the most sensible equity investment for the great majority of investors.”
It’s is worth your time to delve into the entire discussion.
UPDATE: May 12, 2023
More from Robin here discussing the research with Professor Crawford Spence at KCL one of the studies’ authors.
“Study sheds light on cognitive dissonance in active management
TEBI, January 25, 2023
Active fund managers and the rise of Passive investing: epistemic opportunism in financial markets
Crawford Spence, Yuval Millo, James Valentine
Kings College, 06 Jan 2023
Understanding Communities of Practice: Taking Stock and Moving Forward
Davide Nicolini, Igor Pyrko, Omid Omidvar and Agnessa Spanellis
Academy of Management, July 21 2022
Hierarchy of Portfolio Success (June 11, 2018)
Debating Passive Versus Active Investing (October 11, 2017)
Some Advice for Active Equity Managers (May 3, 2017)