Managers benchmarked to an index converge on closet indexing to avoid career risk

Evidence

Some of the overt resistance to indexing by active, stock-picking managers turned to covert concession. If, as was increasingly the case, a manager’s performance was judged relative to an index such as the S&P 500, then there was some safety in selecting a portfolio that closely resembled the makeup of the index. Of course, doing so meant little or no chance of a dramatic overperformance. However, it also greatly lessened the chances of a career-killing relative underperformance: if one’s portfolio did badly, those of other managers would most likely be doing badly too, so the fault would be seen to lie with the market, not the manager. — Donald MacKenzie, An Engine, Not a Camera, 381

Categorization

• XREF: This is a classic principal-agent/agency-costs explanation of closet indexing — connects to the reader’s finance/agency literature and to ‘The Social Control of Impersonal Trust’ themes about agent behavior under monitoring. — connects to: Standardized impact metrics are becoming an investor benchmark — Ève Chiapello, Financialisation of Valuation, 72; Active fund managers rarely beat stock-market indices once costs are counted — Donald MacKenzie, An Engine, Not a Camera: How Financial…, 373; Software performance measurement changed manager behavior even without their understanding CAPM — Donald MacKenzie, An Engine, Not a Camera: How Financial…, 1137 (+2 more)

Broader Connections

• Software performance measurement changed manager behavior even without their understanding CAPM #expands (0.75) — Donald MacKenzie, An Engine, Not a Camera, 1137