Try this better explanation: About $10 trillion in assets have completed their move from pricey and actively managed funds to cheaper and passively managed ones. It has slowed down because the first phase of transition to indexing has been completed. The low-hanging fruit has been picked. If my thesis is correct, after this, inflows will likely be steady but somewhat slower.
I speak regularly with senior management at Vanguard, Dimensional Fund Advisors and another index providers. For years they have had to cope with a deluge of inflows, and I suspect they welcome the opportunity to digest these gains, allowing their systems to catch up to the huge increase in assets under management.
Despite the slowdown in inflows to passive funds, indexing is still giving active funds plenty of competition. The Journal reports that “$29 billion in client money left those [active] funds during the first half of this year.” Any fund manager presented with the choice of slower inflows versus outflows is going to choose the former.
Why must we complicate what is otherwise a simple explanation? Investors have become a little more financially literate; indexing is maturing as an investment style. Those who are hoping for a major reversal of a trend that has been 40 years in the making are very likely to be disappointed.
This column was provided by Bloomberg News.