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Where Index Investing Is Headed: The second of a two-part series about the confluence of factors that favor the rise of index investing
While the overall asset management industry has been growing along with passive investing, the share of traditional active funds has been declining, especially those operating in the developed markets of large-cap equity and government bonds. The global AUM share of traditional active products has fallen sharply over the past decade, from 60 percent in 2003 to around 40 percent at the end of 2014. Accompanying this dramatic change in flows has been increased speculation on the future of active management and the dynamics of active and passive investing.
Passive investing (specifically, using market-cap-weighted indices) is, in certain respects, based off the efficient markets hypothesis. In such a market, the simplest strategy would be to hold all the securities passively in proportion to their market cap. Ironically, market efficiency also depends on active managers doing research and identifying mispricing. The argument that is often raised is that as passive market cap