Passive investments are becoming more important in the bond market, too, though they still make up just 15 percent of funds in the U.S., Europe and Asia on average, Morningstar data show.
“We expect that the growth of passive investing will remain strong,” Alex Matturri, CEO of S&P Dow Jones Indices in New York, said by e-mail.
One concern about the spread of index-tracking investments is that they’ll create market distortions, with money moving into or out of shares because of their status in key indexes, instead of anything to do with the securities’ underlying value, according to Equitile Investments’ Cooper.
Lobbying Pressure
“This can lead to a problem where the markets are not anchored by fundamentals,” said Cooper, who chooses stocks without regard to their index weightings.
Aberdeen Asset Management Plc’s Hugh Young has a slightly different take, saying the influence of index funds has created opportunities for active managers to find mispriced shares.
“We’re perversely happy with powerful indices,” said Young, a Singapore-based managing director at Aberdeen, which oversees about $420 billion. “They ignore the qualities we look for.”
If the index providers want to protect their expanded role in modern equity markets, they’ll need to juggle competing pressures from shareholders, clients and governments, according to Benedict Cheng, managing consultant at GreySpark Partners, a capital markets consultancy.
“When it comes to decisions that influence trillions of dollars and future investments for a country, there is bound to be lobbying,” Cheng said.
With the China assessment, MSCI said it tried to consult with investors overseeing a majority of the roughly $10 trillion of assets benchmarked to its indexes. The firm published consultation papers on the proposal, formed a working group with the local securities regulator and issued press releases to update investors on the nation’s progress.