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Another Reason To Worry About The Rise In Passive Management

Another issue arising from the rise of passive investing: the relative power of activist shareholders.

From a Bloomberg article on Jim Rossman who helps companies fend off activist shareholders:

"Rossman's thesis is that activists could gain more clout as stock ownership is concentrated among fewer owners, with funds shifting to indexed strategies. "It's become a lot easier for activists to ­influence the shareholder base, because they have fewer and fewer shareholders that they have to talk to," says Rossman, who calculates that the top 25 investors hold almost 40 percent of the S&P 500. Research published in September by the National Bureau of Economic Research (NBER) outlined a finding similar to Rossman's - that activists may become more powerful with the rise in passive investing."

The NBER article cited also has a great title: "Standing on the Shoulders of Giants: The Effect of Passive Investors on Activism"

Whether you like them or don't, the rise of passive investing is giving activists more power.