Though the market was beginning to recover from a brutal, decade-plus bear market that had ended in 1982, many investors had little faith in stocks. And passive investing was in its infancy. In March 1985, the Vanguard 500 Index Fund had a mere $330 million in assets.
Today, “Stocks usually go up”’ has become the mantra on Wall Street. As for indexing, that same Vanguard 500 Index Fund index now has $1.4 trillion in assets. According to Morningstar, passive funds writ large now hold more assets than active funds; $16.1 trillion in assets versus $14.4 trillion, compared with $4.1 trillion versus $9.6 trillion 10 years ago.
Riding this four-decade wave of bullishness while buying passive funds has helped many investors fatten returns. From March 1988 to March 2025, the average total annual return for the S&P 500 was 12.6%. But while Geremia acknowledges that indexing has helped reduce fees and given investors broader market exposure, she sees some unhealthy signs beneath the surface.
In a recent white paper titled “Playing a Bigger Game,” Geremia writes about professional investors and “a growing disconnect, between what the investment industry should be doing and what it is actually doing. Its true purpose, she says, is to “support economic prosperity through the responsible allocation of capital and helping investors achieve their financial goals.”
Geremia says money managers today care more about beating indexes and benchmarks and less about finding great long-term investments in companies. “We’ve sort of dumbed it all down and sucked out of the system our ability to really think about how we are putting money to work well for the end investor,” she tells me.
The misalignment begins Geremia believes with the risk and complexity professional investors now take on to achieve the same returns they did 30 years ago. According to Julia Moriarty, co-manager of Callan’s Capital Markets Research group, in 1992 a model portfolio of 56% cash and 44% bonds could produce a 7% annual return.
Today investors would need to allocate money in six asset classes including stocks, private equity and real estate to generate the same 7% return. True, cash and bond yields were higher in 1992 than today, but it’s still the case that a current portfolio carries more complexity and risk—and as Moriarty notes, higher costs as well.
Geremia argues that increased risk-taking forces portfolio managers into “short-term accountability focused on measuring past relative returns.” On one hand, she says portfolio managers are taking more risk, exposing investors to greater potential losses. On the other hand, they have less time to manage the risk and are pressured to measure short-term performance.
“There really is a breakdown of alignment,” Geremaia says. “We’re being measured for beating a benchmark over short periods of time, like one to three years, which is not a great way for us to allocate somebody else’s capital and manage their risk.”
Paradoxically, as the stock market has become dominated by institutional investors, the holding period for owning a stock has dropped. While many index funds hold stocks for long periods, other passive strategies like high-frequency trading do the opposite.
In 1945, institutional investors owned 10% of the U.S. stock market, Geremia writes, but by 2022, that number had grown to 95%. While the average holding period of a stock has fallen from 96 months in 1950 to 5.5 months in 2022.
Those are huge swings.
“Are we really owning companies the way we intended in the past, or is it just getting exposure and really not carrying what you own,” Geremia asks?
Geremia also takes issue with the predominance of indexing, which might appear to be self-serving. MFS is a Boston-based, mostly active, equity mutual fund operation, which means its portfolio managers generally pick stocks, not indexes. In fact MFS, founded 101 years ago and bought by Canadian insurer Sun Life in 1982, is generally credited with creating the world’s first mutual fund.
More recently though, active fund managers like MFS have tried to mitigate the massive migration investors have been making into index funds. Morningstar recently reported that actively managed funds have suffered net withdrawals in nine of the past 10 calendar years. Still, assets under management at MFS are currently $623 billion, up from $413 billion a decade ago.
Geremia isn’t alone when it comes to being wary of too much indexing. Nobel Prize winning economist Robert Shiller has also raised questions about passive investing, telling CNBC “it’s kind of pseudoscience to think these indexes are perfect, and all I need is some kind of computer model instead of thinking about business.”
Even the late Jack Bogle, founder and CEO of Vanguard and called the father of indexing, expressed reservations in a Wall Street Journal contributor piece about his creation. Indexing taken too far, Bogle said, could lead to excessively concentrated of ownership stocks as well as corporate governance issues.
“When I started, it wasn’t about beating benchmarks, it was about making sure we didn’t lose people’s money,” Geremia says. “It was ensuring that we invest in great businesses and trying to find the companies that were going to create tremendous amounts of value in the future.”
Forty years hence, it will be interesting to see if the pendulum has swung back.
Write to Andy Serwer at andy.serwer@barrons.com
