We would support this view and suggest that fundamental indexing is just another fad that is being oversold. I will now turn to the important issue that we are addressing in our research “Why Passive?” As is correctly pointed out in the article, we need active (information-base) investors to obtain efficient pricing. However, as Grossman and Stiglitz (1980) rightly point out, we have an anomaly in that active investing is costly and there is no incentive to pursue this form of investing if markets are perceived as being efficient. As such, those employing active managers might be seen as doing a public service by meeting the costs of active management with no recompense but in the process contributing to market efficiency.

The problem being that the competition between active managers is not working with the current institutional structure contributing to large and persistent, relative and absolute mispricings (Bird et al, 2008) which contribute to capital misallocations resulting in lower economic growth to the detriment of all of us. You acknowledge in your article the need for asset managers but currently they are not delivering. The one conclusion that we have slowly reached over the last 40 years is that just about all of us (professionals and otherwise) have no idea about what an equity security and equity market is worth.

Unlike other assets, this valuation is at the mercy of thousands of events that will evolve in the future about which we have traditionally shown little forecasting ability and, even worse, the processes that we follow have gradually taken on almost ensure that on average we will be wrong most of the time. Of course, this does give rise to opportunities but only a handful of individuals and quantitative processes have been able to demonstrate that they can effectively exploit them. As many have acknowledged in the past, our industry is one of the greatest “trust me” industries that exist but it has done little to justify this trust.

This brings us back to the focus of our research as to why investors have a preference to pursue active management. It is unlikely to be explained by the philanthropic (but misguided) motives alluded to above. It is unlikely to be explained by the pursuit of a very focused objective of maximising the wealth of the individual to whom the funds belong. We look forward to reporting our findings on what motivates people to pursue active investing and wish to acknowledge the assistance of many of your readers by responding to our survey.

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