Active asset management historically added liquidity in volatile markets. But with the rise in passive management, will liquidity suffer?
Passive grows: Passive assets have grown more than $5 trillion, 20% of which are invested in vehicles that track the S&P 500 index. Active managers have lost ground due to poor performance and outflows.
Supply & demand: The average number of available equity shares per company has declined about 7% since 2011. While a lower supply may have had a hand in the bull market, volume and turnover have been low, limiting the need for liquidity.
Liquidity uptick: Market indexes perform better in low-volatility environments. Returns might suffer due to higher volatility, but the turnover provides liquidity.
Opportunity wasted: Higher volatility should create opportunity for active managers, but the asset exodus has left them with less capacity, and perhaps desire to add risk. Index fund rebalancing will demand fewer shares and put more into the market, leaving more sellers than buyers.
*Equity mutual funds and ETF data were used to represent the active and passive universe.
Sources: Bloomberg LP, Morningstar Inc., The World Bank