Passive investing plays only a limited role in setting equity prices

BlackRock is rebranding or adjusting investment strategies on about 11 percent of its $275 billion active stock fund business, putting a greater emphasis on technology-driven investing approaches in the largest set of sweeping changes for the business since transformational mergers that allowed it to grow to manage more than $5 trillion in assets.

NEW YORK: Less than 18 percent of the global stock market is owned by index-tracking investors, according to a new estimate from BlackRock Inc , as it suggested that passive investing plays only a limited role in setting equity prices.

The estimate on Tuesday showed that US$11.9 trillion in stocks were owned by mutual funds, exchange-traded funds, institutional accounts and private investors that track an index. That accounts for 17.5 percent of the $67.9 trillion in global equity market capitalization, according to the data.

Stocks in actively managed hedge funds, mutual funds and institutional accounts total $17.4 trillion, 25.6 percent of the global equity market cap, according to the report.

The remaining 57 percent are assets held by governments, pension funds, insurers or corporations. Such holdings are not overseen by an asset manager and do not track an index.

The data comes as debate rages about the rise of funds that attempt to match the market at low cost rather than focus on beating the market.

BlackRock - the world's largest manager of ETFs, most of which are passive - released its data in a report disputing what its vice chairman, Barbara Novick, called "misinterpretations of information."

BlackRock said active managers drive prices in the stock market, with $22 dollars by active stockpickers for every $1 traded by index funds, according to the firm's data.

Bank of America Corp's research unit said earlier this year that the stocks most held by passive investors have seen wider price swings. Their report pegged passive ownership of U.S. equity funds at 37 percent, up from 19 percent in 2009, though that analysis was limited to funds and did not include an estimate of privately held assets.

Oaktree Capital Management LP Co-Chairman Howard Marks told clients this summer that active managers' underperformance could be temporary and that ETFs' "promise of liquidity has yet to be tested in a major bear market."

A report last year by broker-dealer Sanford C. Bernstein & Co LLC described passive investing as promoting a system of capital allocation worse than both capitalism and Marxism in which shares in the biggest companies are bought blindly.

This year alone, U.S.-based equity ETFs have gathered $214 billion and index mutual funds attracted another $111 billion, while actively managed funds bled $124 billion in withdrawals, according to Thomson Reuters' Lipper research unit. More value is exchanged daily in the top ETFs like the SPDR S&P 500 ETF and iShares Russell 2000 ETF than in most stocks. - Reuters