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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