Strategist who said passive investing is 'worse than Marxism' says AI plays are only making the problem worse

By Joseph Adinolfi

The rise of AI is supercharging the threat from passive investing, says Inigo Fraser-Jenkins at AllianceBernstein

A Wall Street strategist who made a splash a decade ago with a report arguing that the rise of passive investing was "worse than Marxism" has said the problem is even bigger than he initially realized.

On Friday, Inigo Fraser-Jenkins, now co-head of institutional solutions at AllianceBernstein, returned with a new report suggesting that he may have underestimated the potential threat posed by passive investing, especially now that the artificial-intelligence craze has sparked huge appreciation in shares of a handful of companies.

Nearly a decade ago, Fraser-Jenkins raised eyebrows by claiming that passive investing was distorting the processes of price discovery and efficient capital allocation. He said lawmakers should be aware of the important role that active management plays in the economy, and take steps to avoid explicitly undermining the industry.

A 'dystopian symbiosis'

This time around, Fraser-Jenkins said that the market-distorting effects of passive management has combined with the platform dominance enjoyed by major megacap technology companies to create a "dystopian symbiosis" with numerous deleterious effects for both markets and the broader economy.

Passive indexes that allot the greatest influence to the biggest companies do nothing to aid in capital allocation for the broader economy, he said. Instead, they allow undue benefits to incumbent players that already enjoy substantial moats and network effects.

The result is that it weakens economic dynamism by standing in the way of competition and capitalism, while subduing "animal spirits" in the marketplace.

Passive keeps getting bigger

In the near-decade that has passed since Fraser-Jenkins penned his first report in 2016, capital bestowed to funds aiming to track a benchmark has swollen to record levels in the U.S., according to data from Morningstar Direct.

Assets under management for all passively managed U.S. ETFs and open-end funds stood at $19.1 trillion as of the end of October, according to data from Morningstar Direct. That is compared with $16.2 trillion for actively managed funds. These data aren't limited to stock-focused funds. They include bond funds and funds focused on other assets, like commodities and alternatives, as well.

The shift toward passive isn't really anything new. However, recently it has coincided with a surge in concentration among major U.S. indexes like the S&P 500 and Nasdaq-100. As Fraser-Jenkins pointed out, the 10 largest companies in the S&P 500 accounted for about 40% of the total market capitalization of the index's members.

While high levels of concentration aren't altogether uncommon across global equity markets, Fraser believes the situation as it stands could create problems for the U.S. economy.

New technologies have likely driven some of the growth, but the fact that these companies have been allowed to get as big as they are could be a sign that antitrust regulators haven't been aggressive enough. At the same time, the biggest companies have been outsize beneficiaries of a long steady decline in corporate taxation rates, which has the effect of boosting profits, but also creates a social cost in the form of greater government debt.

Plus, by allowing a handful of companies to become so dominant, the U.S. has, perhaps inadvertently, created a system where big companies can simply collect rents instead of innovate. According to Fraser-Jenkins, who cited the work of Greek economist and former Greek finance minister Yanis Varoufakis, this has resulted in a system that more closely resembles feudalism than capitalism.

There is also a risk to investors, who could be left with heavy losses if investors decide to flee shares of the dominant AI companies, even while concentration of passive flows helps make the market appear less volatile.

U.S. stocks finished lower on Monday, with the S&P 500 SPX falling 0.4% to finish at 6,846.51, Dow Jones Market Data showed. The Dow Jones Industrial Average DJIA, Russell 2000 RUT and Nasdaq Composite COMP also finished lower.

-Joseph Adinolfi

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12-08-25 1825ET