”Active investing has been subjected to increasing abuse, particularly by those whose opinions are driven by the persistent accumulation of hard data and logical arguments.”

- Charles D. Ellis

EXECUTIVE SUMMARY

Index funds, which did not exist 50 years ago, now play a prominent role in global financial markets. The growth of indexing was driven by the failure of active managers, in aggregate, to outperform passive benchmarks. This failure is not a new development—it was reported as long ago as the 1930s. The rise of passive management was the consequence of active performance shortfalls.

These shortfalls can be attributed to four sources:

• Cost

• The professionalization of investment management

• Market efficiency

• The skewness of stock returns

We estimate that 20% of U.S. equity assets, amounting to approximately USD 5 trillion, was invested in index trackers as of Dec. 30, 2016. This commitment to passive management could save asset owners more than USD 20 billion annually.