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Given the ever-increasing popularity of passive investing and the flood of money that has poured into index funds, it’s not unexpected that at some point active managers would launch a counterattack.

To be sure, active managers for years have pointed to data showing that over the long run, and especially when management fees are modest, active managers can outperform an index — particularly in specialized, generally less liquid corners of the market. But recently, one active manager, Sanford C. Bernstein, came out with a broadside attack on indexing in the form of a report, “The Silent Road to Serfdom: Why Passive Investing Is Worse Than Marxism.”

Threat to Raising Capital

Probably because of the over-the-top title, the paper has received a lot of media attention, including coverage in The Wall Street Journal and Barron’s. The heart of the argument made by the researchers at Bernstein is that if passive investing becomes too popular, markets will no longer be able to carry out their function as an allocator of capital because only companies that are included in indexes — whether they merit capital or not — will able to tap public markets.

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