The investing world is undergoing major shifts as we enter the next decade in 2023. With increasing popularity of passive investing strategies through index funds and ETFs offered by companies like Vanguard, individual stock picking is expected to decline. These low-cost, diversified funds track market indexes and require less active management, appealing to both retail and institutional investors. As the Big Three fund managers – BlackRock, Vanguard and State Street – continue rapid growth, they may end up controlling 40% of votes in S&P500 companies within 20 years. These trends will have profound impacts on investment behaviors and corporate governance.
Passive investing and index funds gain momentum
The article documents the steady rise of index funds and passive investing over active stock picking strategies that try to beat the market. Structural factors like the 10-fold rise of institutional ownership and the lower fees of index funds contribute to this shift. As index funds track market indexes rather than pick individual stocks, they provide built-in diversification and require less frequent trading and analysis for investors. These advantages, coupled with competitive fee structures, attracted over $1.2 trillion in net flows into passive funds over the past decade, compared to $2.3 trillion withdrawn from active funds and stock picking strategies. This divergence is likely to continue as investment managers allocate more assets to passive vehicles.
The Big Three consolidate power
With economies of scale and first-mover advantage, the Big Three fund managers are rapidly consolidating control of the passive investing industry. BlackRock, Vanguard and State Street Global Advisors collectively manage over 90% of the ETF market in the U.S. They have also captured the overwhelming majority of asset flows into the investment industry, growing much faster than competitors. The article projects based on past trends that the Big Three could control 40% of votes in S&P 500 companies in the next 20 years as assets concentrate into a ‘Giant Three’. This raises corporate governance concerns about incentives and voting patterns of essentially passive index fund managers wielding such outsized influence.
Active stock picking declines
As money flows into low-cost, diversified passive funds, active picking of individual stocks is likely to decline over the next decade. The popularity of self-directed trading through brokers like Robinhood also shot up during the pandemic, but research shows retail traders significantly underperform simple index fund returns. While some fund managers may still be able to beat the market through skilled stock analysis or factor investing strategies, most individuals and institutions are shifting towards passive funds tracking indexes like the S&P 500. This extends the momentum of dollars moving from active to passive vehicles.
In summary, major investing trends to watch over the coming decade include the accelerating rise of passive index funds from leading providers like Vanguard, the consolidation of power among the Big Three fund managers, and the overall shift away from active stock picking towards diversified market index approaches.