The Last Active Investor - A Work Of Fiction

May 11, 2016 9:48 AM ET2 Comments
Keith Quinton profile picture
Keith Quinton


  • The rise of passive management has been the investment industry story over the past 40+ years.
  • But all the money can't be passively managed.
  • What happens to markets as the passive percentage rises?

July 21, 2039

The satellite trucks are lining the streets in this suburban New Jersey town just as they always do on the third Thursday of every month. As it is July, slightly fewer reporters are wandering around. Quarter-ending months are big and December year-end is the biggest in terms of coverage but still several dozen reporters are waiting for the 3 pm reporting deadline. Microphones, cameras and a podium are set up in front of Charles Morse's modest white raised ranch house tucked in behind a spreading maple tree. Soon the last active investor would be announcing new stock prices.

The Success

How had the pricing of every individual security in the world's largest and formerly most liquid market ended up here? In two words: passive management. First conceived in the 1970's, S&P 500 and other index-based approaches slowly and surely began to gather assets. The addition of ETFs in the 1990's and smart beta passive vehicles in the 2000's accelerated the growth. No investment skill (aka. alpha) was required to launch a new fund or product and by 2015 30% of the stock and bond markets were held by passive investors. The pitch and reason for such explosive growth over 40 years: lower fees and better than average (sometimes top quintile) performance versus active fund managers. Portfolio success became a function of marketing and not investment skill. The money poured in.

Appealing to investors partly via behavioral finance theories like "Loss Aversion" and "Buyers Remorse", index fund marketers succeeded beyond their wildest dreams. Even successful, multi-year outperforming funds that generated enormous incremental life-changing wealth for their shareholders saw outflows. What was never spoken of was the benefit of outperforming the market in terms of wealth creation and passive marketers downplayed the rewards of active management while emphasizing the downside. However, index fund owners don't get particularly rich

This article was written by

Keith Quinton profile picture
30+ year quant equity experience running US portfolios

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Keith Quinton is a retired portfolio manager living in Hanover, NH. He owns no index funds nor ETFs and is doing his part to keep markets efficient and well-priced by owning a portfolio of actively traded stocks. The views expressed are his alone and not those of any former, current or future employers.

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