Passive management is becoming a crowded trade

Author: Portfolio Specialist Group

June 28, 2017

You may be familiar with the term “crowded trade” describing situations in which a large amount of people all share similar views, investing in the same security or strategy. However, this popularity creates heightened risk due to liquidity constraints in the event these market participants choose to unwind their positions simultaneously.

Consider this term on a larger scale in terms of support for active and passive management over the past decade. As depicted, a rush of flows into passive investments, by way of mutual funds (green) and ETFs (blue), has occurred in lieu of actively managed mutual funds (red).

Passive management clearly becoming more crowded than active management

Source: Ned Davis Research, June 2017


A proxy for active and passive flows

Source: Ned Davis Research, June 2017

Importantly, this isn’t necessarily a case of passive management handily outperforming active management. In fact, active has performed equally with passive since October 2016, as per reports from Ned Davis Research.

Further, if passive flows are justifiably dominating to the extent they currently are, one would expect a high correlation amongst stocks within the S&P 500. However, correlations have actually been in a steep decline over the past five years.

One would assume S&P 500 correlation was moving higher given strong passive flows; rather, it is falling

Source: Cornerstone Macro Research, June 2017


No investment trend lasts forever and flows into passive investments appear stretched at a time that the Fed is tightening financial conditions (rate hikes and planning on unwinding its balance sheet). Encouragingly, we believe AGF and other active managers are well positioned to benefit from this expected transition in the months and years ahead.




Commentaries contained herein are provided as a general source of information based on information available as of June 26, 2017 and should not be considered as personal investment advice or an offer or solicitation to buy and/or sell securities. Every effort has been made to ensure accuracy in these commentaries at the time of publication; however, accuracy cannot be guaranteed. Market conditions may change and the manager accepts no responsibility for individual investment decisions arising from the use of or reliance on the information contained herein. Investors are expected to obtain professional investment advice.




Written by

Portfolio Specialist Group

AGF Investments Inc.

More articles like this.

U.S. Fed reveals more hikes on the way

AGF Weekly Perspectives “A recap of last week’s top economic news and what’s to come”…

Read More

Economic data points to higher markets

A busy week in geopolitics, central bank meetings and economic data largely point to supportive…

Read More

The implications of FinTech

FinTech is creating a digital revolution in the world of finance and causing dramatic changes…

Read More