INTRODUCTION
0
2
4
6
$8 trillion
ACTIVELY MANAGED
PASSIVELY MANAGED
$4.28
trillion
$4.37
trillion
2008 2010 2015 2019
SEPT.
2019
SOURCE: MORNINGSTAR
When “Passive” Turned Aggressive Inexpensive index funds have lured investors and their assets away
from “active” managers.
INVESTOR’S
GUIDE
2020
128
FORTUNE.COM // DECEMBER 2019
O
VER THE PAST DECADE, investors have reaped
immense gains thanks to the longest-ever bull
market in U.S. stocks. Most of us have also
profited from something else: a slow-motion
seismic shift that has slashed the cost of playing
the market.
The earthquake in question is the rise
of “passive” investing, exemplified by index mutual funds and
exchange-traded funds that track benchmark indexes. Ten years
ago, stock investors held three times as much money in actively
managed funds—funds whose holdings are typically selected by
MBA-wielding analysts and number crunchers—as they did in pas-
sive funds. This August, passive funds wrested away the crown, sur-
passing active ones in assets under management for the first time.
This financial revolution has been spurred by budgetary com-
mon sense. Passive funds cost far less to operate, and their creators
pass those savings on to customers in the form of much lower fees.
A raft of studies has shown that those savings often outweigh any
performance edge conferred by the active managers’ expertise. And
technological changes that sharply lowered the cost of trading have
only widened that cost advantage. (To see how one Wall Street
giant is struggling to adapt to such changes, read Jen Wieczner’s
profile of Goldman Sachs CEO David Solomon, on page 158.)
Above all, the fact that U.S. indexes have been on such a tear has
made passive investing feel like a no-brainer. When a rising tide is
lifting all boats, why pay extra to let someone else steer your sloop?
The new decade, however, could challenge our faith in the power
of passivity. Even the more bullish strategists interviewed in the
2020 Investor’s Guide expect lower stock returns in the years ahead.
As Savita Subramanian of Bank of America
Merrill Lynch told our Investor Roundtable
(page 146): “The companies that are going to
outperform the market aren’t big enough to
offset the companies that are going to under-
perform.” Index investors, in other words, may
soon learn that they aren’t immune from pain.
What’s the antidote to disappointing returns?
It isn’t abandoning passive funds: The long-
term advantages of investing cheaply are too
good to surrender. But the time may be right
for playing stock picker again. Historically,
investors who consistently beat the market
have done so by devoting at least a small part of
their portfolios to concentrated bets on timely
trends—and when markets are sluggish, that
outperformance looks even more meaningful.
In that spirit, Shawn Tully profiles one
highly strategic thinker, Weijian Shan, who
has earned stunning returns from targeted
investments in Chinese consumers (page 170).
And in our annual stocks and funds guide
(page 132), Rey Mashayekhi and Anne Sraders
get very choosy, delving deep into five narrower
sectors that should thrive even—or perhaps es-
pecially—if the broader market disappoints.
Find more stories and more advice at fortune
.com/investors-guide.
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