JPMorgan Sees $7.4 Trillion Passive Selling Pressure in Downturn

(Bloomberg) -- When the next downturn occurs, beware passive investors.

That’s the warning from JPMorgan Chase & Co., which says $7.4 trillion of assets managed by passive funds around the world -- concentrated in large-cap and U.S. small- and mid-cap stocks -- will exacerbate a rout during the next recession.

“This is something worth noting at this late stage of a cycle given that passive investing seems to be trend following, with inflows pushing equities higher during bull markets, and outflows likely to magnify their fall during corrections,” analysts Eduardo Lecubarri and Nishchay Dayal wrote in a report dated Wednesday.

Passive investing wasn’t a big driver of equity returns in the last recession, they say. Back in 2007, the strategy’s overall size amounted to about 26 percent of actively managed large and all-cap funds’ assets under management (AUM) in the U.S., and about 15 percent outside of the U.S. Eleven years later, those figures have jumped to 83 percent and 53 percent, respectively, the bank’s analysis shows.

JPMorgan also notes that the strategy is far “more skewed to large-caps than what their market caps would command” -- passive AUM in large-caps is 10 times that of small- and mid-caps, “making this asset class far more exposed to momentum selling during market downturns.”

To contact the reporter on this story: Joe Easton in London at jeaston7@bloomberg.net

To contact the editors responsible for this story: Beth Mellor at bmellor@bloomberg.net, Paul Jarvis, Joanna Ossinger

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