Some will argue that the passive
investment trend has helped make the
performance of companies more similar, or
lowering dispersions, as the strategy mandates
the agnostic allocation of capital.
that as this trend seems unlikely to unwind, the
current trends may stay that way for some time.
Some studies, though, show that price setting is
left to active managers while passive investors
are the price-takers.
On top of the feeling many managers will
have that they cannot further increase dividends
relative to earnings, there are several structural
shocks that could compound their misery in 2018.
The first is that upwards pressure on wages
seems increasingly likely as the unemployment
rate continues to plumb multi-decade lows (see
our piece on the likelihood of rising US infation
for more details). Second, the price of oil
continues to climb. An increase in these two input
costs will signifcantly affect lower quality
companies as it will cause a disproportionately
large squeeze on their already low margins.
When that happens, investors may realise they
have been propping up the wrong companies.