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- Passive funds continue to gain assets at the detriment of active fund managers.
- But there’s a strategy involving Russell 3000 stocks that active managers can use to benefit from passive inflows, according to Goldman Sachs.
Passive fund managers are here to stay and aren’t likely to cede much of their investor dollars to stock pickers in the medium term, according to Goldman Sachs.
The firm calculated that the assets managed by exchange-traded funds have increased 300% since 2011, versus 80% for mutual funds.
But there are strategies that active managers can adopt to profit from the inflows to passive, Goldman’s Arjun Menon said in a note to clients on Tuesday.
One of them includes taking account of the Russell 3000 stocks that are the most overweight with passive funds.
The popular opinion among investors is that passive inflows are detrimental to small-cap stocks, Menon said. This was true in the early-mid 2000s but is no longer the case; in fact, flows and small-cap performance now have a positive relationship, according to Menon.
“Based on current passive equity fund positioning, stocks at the low end of the capitalization spectrum are likely to be the biggest beneficiaries of passive inflows,” Menon said. He added: “Similar to sector allocations, we encourage active managers to assess their factor exposures in light of the potential boost or headwinds from passive inflows.”
The list below highlights stocks that passive funds are overweight relative to the Russell 3000 by at least three basis points, from the least to the most.