With more funds flowing into passive and factor investing, do you foresee the annual returns in passive and factor investment eroding over a 30 year period?

Hi Linton, this is a good question. We think passive investing in its current form which allows cheap low-cost access to individual retail investors is a huge blessing and has benefited many who have used the method to invest for the long term. It is difficult to say what the true impact in the growth in passive investing has had in markets, but that is very different from factor based investing. Passive investing is just the market returns whatever happens to the markets. So passive investing will just give you market returns and there is no erosion. Factor based investing also depends on the factor. The common ones like Value, Small and Quality have outperformed the markets or underperformed across different time periods. But they are proven factors of returns because the really long term historical data shows that they were able to give you a better return. Whether this is affected by passive investing is up for debate. What passive investing has done is it has forced the active managers and industry to adapt. It is interesting to note that one study showed that professional money managers have been closely tracking their benchmarks for decades now. That’s because those indexes are their benchmarks. If you sum up the collective holdings of active managers in aggregate then what you basically get is a market-cap-weighted index. Index fund investors are simply buying what the active investors have laid out for them.

Things of the future, nobody, even not professionals could honestly answer that question. One principle of investing: nobody can predict the future.