Capital Markets: Observations and Insights
Passive Problems? Reframing Risk
RISK
• The vast majority of passive investing allows relative performance to drive relative weighting changes, irrespective of fundamentals ‒ This can exacerbate problems such as in Tech in the late 1990s or in Financials prior to the Global Financial Crisis
Passive Proves Problematic at Points
40%
300
30%
250
Peak Weighting, Wrong Time
Peak Weighting, Wrong Time
S&P 500 Tech Relative Performance
S&P 500 Financial Relative Performance
30%
200
20%
150
20%
100
10%
50
10%
S&P 500 Tech Weight
S&P 500 Financial Weight
0%
-
0%
-50
1995
1997
1999
2001
2003
2005
2000
2002
2004
2006
2008
2010
2012
Source: FactSet. The performance data quoted represents past performance, which is not an indication or a guarantee of future results.
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