As indexing strategies gain in popularity, I am seeing a common selling point from active stock picking fund managers - the idea that more indexing creates more opportunity for active managers. This appears correct on the surface. After all, if everyone started using index funds then this would create a homogeneous set of product wrappers that cannot accurately reflect the underlying companies.1
But this myth gets the causation precisely backwards. It is not the indexing that is causing more homogeneous markets. It is more homogeneous markets that are causing the rise of indexing.
We know, empirically, that asset classes have increased substantially in correlation across the last 50 years. We also know that the global economy is becoming increasingly correlated as hyperglobalization creates one interconnected global marketplace. So, what's happening here is that large corporations are all starting to look more and more like one another. More importantly, big… Read More …