This is a headline from the Wall Street Journal yesterday (April 7). For years we have seen a shift the other way, from active to passive. This shift has caused major changes to the way markets work, including:
1. Active managers will typically hold more cash than index managers. Therefore, a shift to passive also means more money coming into stocks.
2. Since most of the major indices are market capitalization weighted, the companies at the top continue to get bigger and therefore become an even larger weight. This makes size in and of itself an advantage.
Norway’s sovereign wealth fund is the world’s largest in terms of assets, so anything they do is important to watch. Markets shift from time to time from stocks being mostly correlated to stocks being uncorrelated. When they are correlated there is not necessarily a huge advantage to active management. However, in times like this, when stocks are largely uncorrelated, there can be huge advantages to being more active. If we start to see a shift away from passive to active there will be huge ramifications for the market.
Another interesting point from the new strategy is more of a focus on ESG (environmental, social, and governance) investing. We are working on a research report on how we view traditional ESG management, including common flaws, so keep an eye out for that.
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