A recent article from The Brookings Institution by Robert C. Pozen and Theresa Hamacher (Has the Death Knell of Active Management Been Rung Too Soon?) points to three recent studies which conclude that efficient markets (and price discovery) require active investment management--and that passive indexing produces pricing anomalies, increased volatility, and market inefficiency. Pozen and Harmacher conclude:
",,,as the level of passive investing increases, markets become less efficient. Index funds change their holdings mainly in reaction to investor inflows and outflows, so they are much less responsive to changes in stock price or company information than are actively managed funds".
Moreover, they add that active funds produce more efficient markets by arbitraging mispricing and increasing the attractiveness of passive indexing.
In other words, passive and active investment management are not mutually exclusive alternatives, but in fact are symbiotic.