Blue Flower

'A passive tax to subsidise active management' by Steve Johnson on Financial Times published on 26 Sept 2016.

Dear Steve,

Let me try to summarise the case that you are making as per my understanding, in the following simple words: 

The active managers do the 'Saintly job' of capital allocation.  They are too important for the survival of capitalism.  They look 'ugly' because of the lower fees in passive management. So suggestion is to tax the passive products and make them as 'as ugly' as actively managed products. 

Many of us have still not forgotten the 'too big to fail & too important to fail' stories from the last financial crisis.  

I think the above case, suffers from few fundamental fallacies:

1.   Please remember the publicly traded 'stocks & bonds' are just 'one' of the ways of capital allocation. Allocation of capital is the core function of capitalism. It will continue to exist.  As the 'search of Yield' continues,  the capital allocation will also continue. The capital will find much easier and efficient ways.  The raise of alternate investment platforms is just one example of this process of discovery. 

2.  There are various fundamental reasons why the active managed funds did not deliver performance.  Those reasons needs to be addressed to resolve this problem. Fee is just one of problems.  In fact, many investors would be willing to pay higher fees, provided there is proportionate increase in investment product performance.

3. The main-stream investment marketplace is an over-segmented and over-crowded market place with lot of products with mediocre performance. As per Investment Management Association, there are about 200 firms in UK that market thousands of their products.  Financial Times, itself publishes NAV for products from about 140 firms.  I think it will reduce to a total about 40 in the next 10 years unless active management firms make radical changes products and also to their business models.



1. 'A passive tax to subsidise active management' by Steve Johnson on Financial Times published on 26 Sept 2016. (need subscription for reading the online edition)