The growth of passive investing is reverberating across the investment universe, materializing in ownership concentration, short-termism and the erosion of long-term value creation, MFS Investment Management President Carol Geremia warned this week.
Geremia, also the co-head of global distribution at Boston-based MFS, echoed the dangers of excessive passive investing that the late Vanguard founder John Bogle predicted. Bogle once told a publication: “If everybody indexed, the only word you could use is chaos, catastrophe. The markets would fail.”
Having met Bogle, Geremia said, “he came to MFS with a very strong message: “He said, ‘I didn’t know [passive investing] was going to get this big.’ What he was referring to was: If 50% of the public markets is in passive [investments], we’re going to have chaos,” Geremia told an audience at the 2026 Active Advantage event in Sydney this week.
Geremia explained that Bogle was referring to problems investors would face in the future related to concentration risks, governance and proxy voting. She said Bogle’s overall message was that there needs to be a better balance between active and passive investing.
Dangers of Short-Termism
She also warned about a focus on short-termism and how quantifying the timeframes of market cycles and other phenomena have been sources of irritation for active managers.
“The industry has spent years not wanting to define what a full market cycle is, because it feels like it’s all over the board,” Geremia said. “I’ve had many debates with … academics, and it helps to get some of these numbers right.”
About 40 years ago, when Geremia started her career, the average market cycle was viewed to be between seven and nine years.
“The whole market cycle today is now closer to 12 years. But the issue is not a full market cycle, necessarily … It’s the misaligned objective and where the incentives are, because the tolerance of underperformance of a benchmark is [one-]third of a full market cycle,” Geremia said. “The conversation is not necessarily wrong or right. All this says is we have got massive misalignment and massive disconnect in terms of the incentives that are being driven through our system.”
Geremia pointed to the booming passive investing market, citing the Index Industry Association’s estimates of 2.4 million indexes in existence, compared with only 43,000 public companies.
Investors “hire and fire active management at the wrong time,” Geremia said. “So we end up incentivizing the wrong behavior to change the benchmark. We pick the top-quartile managers based on past performance, and every five-year period, almost 50% of the time, managers are dropping to the bottom half.”
While this tends to be costly for investors, past research shows exactly how much.
“There are some academics out there that have done the math, and it’s anywhere from 80 to 150 basis points of loss of returns annually, just because we are hiring and firing at different times based on anchoring the idea that either a full market cycle is [three years or five years]—and it’s not—or [that] we’re chasing past performance,” Geremia said.
A version of this article originally appeared in our sister publication, Financial Standard, which, like CIO, is owned by ISS STOXX.
Tags: passive investing