Ollie Smith: Now, financial journalists are busy folks at the moment, aren't they? But one of them has managed to find the time to write an entire book about the rise of passive investing. The FT Alphaville editor, Robin Wigglesworth, joins me now.
Robin, thanks for being here. I just want to ask you, what did you change your mind about while researching and writing the book?
Robin Wigglesworth: Well, it was less because of the book but more about these market events. So, I was writing through the pandemic, and March 2020, we had this massive shock to the financial system. And going into it I would say that I shared some of the concerns about how fixed income ETFs, especially credit ETFs, would hold up in that kind of a scenario. If somebody told me what was going to happen before the event, I would have predicted absolute carnage. And it was pretty messy in markets. But I actually think fixed income ETFs did better than most people would have predicted, including me. And this isn't hill I'd quite die on yet, but I've gone from thinking that ETFs are perhaps even dangerous for illiquid asset classes like fixed income to actually thinking they might even be a superior fund structure for illiquid asset classes because of the pressure release valve that the trading of the shares basically consists of.
Smith: And during our session today, you highlighted what you felt was a sort of certain sensationalism around the academic evidence for passive investing. Indisputable there it is, there's a certain kind of something going on in terms of reproducing material, isn't there?
Wigglesworth: Well, there's something that people have called the replication crisis happening across almost every academic field, whether it's medicine, biotech, and finance as well, where people haven't been able to replicate certain signature studies. So, nobody is questioning that obviously indexing is superior over the long run. Morningstar does studies that show this every year, right? And this actually keeps getting better and better for passive and worse for active. But I've seen more and more research come out on passive or (journeys of) investing strategies, and I've become increasingly skeptical because I know that the temptation is always whether to sort of subconsciously or consciously skew the data, massage the – mine the data and you'd get a good, interesting conclusion, because that's the kind of stuff that gets you published papers, that's the kind of stuff that wins you tenure. For journalists, it's frankly the same sad dynamic sometimes, but it's made me a little bit more wary as somebody consumes a lot of academic research.
Smith: Sure. And just finally, I mean, one of the things that people worry about when it comes to passive is the issue of concentration risk. Should we be more worried about that than we already are? Should we be more worried about market distortions and stuff?
Wigglesworth: I think, if you'd asked me a few years ago, I'd say we should be worrying more about concentration. I still think it is my biggest concern, but I think right now, we have maybe the appropriate amount of worry. It has come up on the agenda both in the market, among analysts, among journalists and among policy mix as well, both in the U.S. and in Europe. So, now, I think maybe we are in danger of maybe even overdoing that. For me, the concern has been like – I'm not concerned about how passive is distorting markets. I'm not hugely concerned about what I call kindly the innovation that happens in this space, lots of dumb, silly ETFS being churned out, because fundamentally, I think they're stupid and maybe dangerous, but they're still pretty small.
And I think concentration is perhaps the biggest thing. There's more about where we're heading in maybe 20 years' time rather than where we are today. And after kind of having banged the drum about this for a few years and before I wrote the book, now I feel maybe we're in danger of overdoing it. I don't think BlackRock and Vanguard own the entire world for that way. But it's one of those things that we just need to keep an eye on, because frankly, the benefits of these oligopolies are real. So, you can't tackle them quite smoothly. It's not just breaking them up, because it would cost us as consumers. So, that's why it's one of those, kind of, conundrums that doesn't have an easy clean answer. A lot of other things I could say, well, we just do this. It might be hard, but we do this, it's problem solved. This I just think is just difficult to deal with.
Smith: Thank you very much. For more on active/passive, check out our regular active/passive barometer on any of Morningstar's editorial sites. Until next time, I've been Ollie Smith for Morningstar.
