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Existential threat looms for 31% of the S&P 500

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Passive investors in broad market indexes may be overlooking a hidden threat to their returns, according to T. Rowe Group’s David Giroux.

About 31% of companies in the S&P 500 face a major threat to growth, said Giroux, the firm’s chief investment officer for equity and multi-asset and head of investment strategy.

That figure is up from 20% of companies in the index two years ago, according to his estimates.

The areas under most intense pressure, or “secular risk,” include retail and grocery stores being challenged by the likes of Amazon.com, cable networks struggling with the growth of streaming services including Netflix, and legacy technology and hardware companies seeing customers migrate to the cloud.

“It’s hard to outrun secular risk,” Giroux said at a press briefing in New York on Tuesday.

The cumulative effect of these pressures pose a “powerful challenge” to passive investing, according to Giroux. That’s because index-tracking products such as exchange-traded funds may overlook weaknesses in individual companies and industries, he said.

Active managers that focus on stock picking, such as T. Rowe, have been raising warning flags about index products even as investors have rushed into these relatively inexpensive funds that provide broad exposure to markets. It’s been a tough challenge for active managers. In just a decade, U.S. ETF assets have topped $3 trillion.

Asset managers have found it difficult to counter the passive trend. Stockholders have punished money managers overall this year with an S&P index of asset managers and custody banks down almost 20%. T. Rowe has lost almost 9% year-to-date.

Giroux said that in the next few years, several groups that account for 13% of the S&P 500 could be added to the collection of pressured companies. But several industries are likely to escape the secular change unharmed, including utilities, industrials and defense, business and information services and game-changing technology behemoths.

T. Rowe, based in Baltimore, managed $1.01 trillion in assets as of Oct. 31.

Bloomberg News