Interested in the latest thinking about active, passive and everything in between? Here are a few recent articles that have caught our eye:

Finding the inflection point for passive

John Authers, commentator and editor for the Financial Times reports on an interesting study by strategist Vincent Deluard of INTL FCStone.

Deluard takes at fresh look at the effect of index membership, based on the insight that stocks are usually included in more than one index. His findings: After adjusting for size, stock valuations and returns go up as the number of index memberships go up.

Authers concludes that the findings are “suggestive” that peak passive has been reached in the United States. As he notes, “It is time to treat index membership as a risk factor in its own right, and as a possible source of returns.”

Read the article on the Financial Times website (registration required)

Adding value during earnings announcements

Active managers are “relatively sophisticated processors of earnings news,” say Charles Lee of the Stanford University Graduate School and Christina Zhu of The Wharton School University of Pennsylvania, in a study titled “Actively Managed Funds and Earnings News: Evidence from
Trade-Level Data.”

Plus, active manager trading during earnings announcements “improves the price discovery process,” by facilitating the convergence of stock prices to fundamental value.

In other words, Lee and Zhu conclude that active managers have skill and that their skill benefits the markets as a whole.

Read the study on SSRN

The rise of guaranteed close trading

Alexander Osipovich and Liz Hoffman of the Wall Street Journal report on the consequences of the rise in “guaranteed close” trading. Index funds often prefer to execute trades on market close, because the indexes they track are based on end-of-day prices. In 2017, over 8% of the
volume in S&P 500 was executed on the close, according to Credit Suisse.

Not surprisingly, trading firms have responded to index investor demand, by offering “guaranteed close” executions.

Read the article on the Wall Street Journal website (subscription required)

The best way to buy high and sell low

Rob Arnott, Vitali Kalesnik and Lillian Wu of Research Affiliates analyze the drawbacks of traditional index funds. Stocks are typically added to an index after they’ve gone up a lot, and they’re most likely to be deleted after they’ve suffered a steep decline. Making matters worse, price weighting means that indexes have heavy exposure to stocks with the heftiest valuations.

The silver lining: Indexes shortcomings create opportunities for active managers who trade against them. https://www.researchaffiliates.com/en_us/publications/articles/674-buy-high-and-sell-low-with-index-funds.html

Download the article from the Research Affiliates website.

The intersection of private and passive

Bloomberg columnist Matt Levine talks about the growth in the private markets and its implications for passively-managed funds.

Read the column on Bloomberg online (scroll down to the “Going private” subhead)