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The Equitymaster Research Digest

Will the Biggest Financial Innovation Kill Stockpicking?
Sep 14, 2016

Back when I was doing my MBA, Paul Samuelson's Economics was a big hit. I rarely saw any of my batch mates taking notes from anybody else. To me, Samuelson has always this very famous and and influential economist.

It was only recently that I came to know just how influential he is. But before we get to that, a short detour...

The Mutual Fund Colossus

Here's an astonishing statistic from The Wall Street Journal.

During the year ended May 31, the US mutual fund industry collected a total of US$87 billion. Of that, a whopping US$224 billion came into one fund house alone. This means the fund house's competitors suffered a massive outflow of US$137 billion.

Mind you, this is not a one off.

It appears as if the US mutual fund industry, with the exception of one fund, is liquidating itself. And almost all that money is flowing into this one mutual fund colossus. At last count, this colossus, on behalf of its 20 million investor-clients was holding more than US$3 trillion in mostly passively managed funds, i.e. index-style investments.

You can probably guess the name of the fund house. It's become synonymous with index funds. I am indeed referring to the passive investing behemoth Vanguard.

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