Published by Harriman House, £25
The rise of passive investing has been one of the big trends in financial markets over the last decade. The idea that investors should stick their money in index funds tracking a major market (such as the FTSE 100 or S&P 500), and then stick with their investments though thick and thin, has rapidly become the conventional wisdom. However, fund manager Niels Jensen thinks investors who follow this advice are likely to end up disappointed. He suggests there are signs of trouble that could reduce returns produced by a simple indexing strategy.
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Perhaps the most immediate is debt. Individuals, firms and governments have taken advantage of the low interest-rate environment to borrow more, so that total debt is now higher than it was ten years ago in most major economies. This is likely to become a major problem once interest rates start to normalise.
Meanwhile, an ageing population threatens to weigh on developed economies, because the imminent retirement of baby boomers will reduce productivity (and the tax base), while increasing the burden on social-security and healthcare arrangements.
Jensen also notes that one of the biggest changes over the past 50 years is the decline of the middle class in the developed world, with labour's share of national income declining. This will reduce demand for goods while fuelling a populist backlash that could lead to protectionism. Despite the discovery of shale oil and progress with renewables, energy supplies are running out, which will push up prices.
Even the shift in growth towards east Asia could end up lowering the living standards of those in the West if it makes food more expensive. Finally, the ratio of wealth (ie, asset prices) to GDP looks high and can be expected to revert towards the long-term average at some point, which bodes ill for markets.
Entire books have been written on each of these issues, but Jensen tries to bring all six together in one work, and to focus on the implications for investors. The book is relatively short, at around 200 pages, but he more than makes up for this by providing a large number of references to other reports and studies that the reader can look up in his or her spare time. Perhaps the only real flaw is that at times it is too detailed, with a lot of diagrams, charts and equations.
The End of Indexing is a thought-provoking read. At the very least, it will force you to reassess your investment strategy and should dissuade you from assuming that the current bull market will last forever.
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