Hedge fund manager says index products harm growth creation

[Crewer]

I’m essentially an index fund (low fee fund) investor. I never thought of myself as someone who is devouring capitalism (though I have wondered what will happen if a very large fraction of investors were indexers). So do we need to do our patriotic, or whatever, duty and pay higher fees in order to save the system?!

https://www.bloomberg.com/news/arti...iott-hedge-fund-returns-3-5-in-the-first-half

Just curious what you think - though I suspect many of you think like me - that it's just another argument for why someone should pay those Wall Street types outrageous fees.

 

[Blue Collar Guy]

I’m essentially an index fund (low fee fund) investor. I never thought of myself as someone who is devouring capitalism (though I have wondered what will happen if a very large fraction of investors were indexers). So do we need to do our patriotic, or whatever, duty and pay higher fees in order to save the system?!

https://www.bloomberg.com/news/arti...iott-hedge-fund-returns-3-5-in-the-first-half

Just curious what you think - though I suspect many of you think like me - that it's just another argument for why someone should pay those Wall Street types outrageous fees.

The man is 100 % right. Tell all your enemies to follow his advice.

 

[UnrealizedPotential]

I doubt if it matters. There will always be plenty of investors who think they can beat the index on their own. It never seems to go out of style. I wouldn't worry about it. Besides, what is Mr. Singers motivation for going public with his opinion? I doubt he has the good of the public in his thoughts.

 

[MRG]

I’m essentially an index fund (low fee fund) investor. I never thought of myself as someone who is devouring capitalism (though I have wondered what will happen if a very large fraction of investors were indexers). So do we need to do our patriotic, or whatever, duty and pay higher fees in order to save the system?!

https://www.bloomberg.com/news/arti...iott-hedge-fund-returns-3-5-in-the-first-half

Just curious what you think - though I suspect many of you think like me - that it's just another argument for why someone should pay those Wall Street types outrageous fees.

Vanguard started in 1975, bound to fail. If you look at the ICI's data on fund costs fees have been falling since then. More folks are continuing to move to passive funds yet the market continues to climb.

The authors arguments make little sense to me. As an individual in a fund I don't see where I have any stick to thump the manager with, nor do I believe I'm going to band together with other investors. YMMV

 

[OldShooter]

People whose rice bowls rely on suckers' believing that active investing is viable have a vast trove of highly speculative ghost stories. This is another one.

At the core of most of these is the false premise that passive investing can reach close to 100% of all investing. This is impossible; humans have 100K years of breeding where greed and optimism were rewarded by being disproportionately successful in the gene pool. That's why casinos and lotteries will never go out of business. Also, the vast amounts of money to be extracted from the naive and the ignorant by the investment industry means the industry is totally devoted to selling the impossible dream. So, 100% passive? It will never happen.

Oh, and Singer's results were in the toilet last quarter. No wonder he looked for something else to talk about.

 

[Mdlerth]

Translation, please

Mr. Singer is quoted as saying "...index fund providers don’t have incentive to push companies to change for the better and create shareholder value."

This is secret code for "absent hedge fund meddling, companies would waste money on pay and benefits for ordinary employees."

I am still waiting to see the first company targeted by activist buttinskys end up better off in the long run.

 

[Crewer]

Mdlearth: This is secret code for "absent hedge fund meddling, companies would waste money on pay and benefits for ordinary employees."

I'm with you. Maybe add "invest in longer term developments" to that as well.

 

[foxfirev5]

All we can do is let the market sort it out in the long run. If indexing gets too big eventually the pendulum will swing the other way. Personally I invest to capture a portion of GDP and income growth. Give me a portion of this in the form of dividends and I'm happy. Index funds provide the bulk of meeting this objective. However I also venture a little bit on the dark side by doing a little picking.

 

[MRG]

Mr. Singer is quoted as saying "...index fund providers don’t have incentive to push companies to change for the better and create shareholder value."

This is secret code for "absent hedge fund meddling, companies would waste money on pay and benefits for ordinary employees."

I am still waiting to see the first company targeted by activist buttinskys end up better off in the long run.

+1
I'm reminded of my last stupid mistake, I left money at Megacorp so I had access before 59.5. No worries it was in a highly regarded managed fund. Even Buffet sang how brilliant this fund manager was. He and Buffet were both mentored by Ben G.

The fund manager was overweight some drug stocks, that fund was on fire! What could go wrong? Martin Shkreli that's what could go wrong and did. Whole lot of smart fund managers got fooled.

 

[Red Badger]

Per Singer...

“In a passive investing world, small shareholders have little-to-no voice and no realistic possibility of banding together, while the biggest shareholders have no (repeat, no) skin in the game so long as the money manager does not underperform the index by five-hundredths of a percentage point, in which case the customer calls up the money manager and starts yelling.”

Actually, anyone in index funds knows (or should know) that the fund is going to trail slightly below the index. And yeah, his active hedge fund has got it's ass kicked lately.

 

[Running_Man]

The comments about last quarter's results have zero meaning. I would hope people here would have some respect for a man of Mr Singer's talents, he is a risk averse stock picker never using leverage.

This risk aversion has paid off handsomely with Elliott Management reporting only two down years in the last 38 years of its existence and generating average annual returns of 14.7% in the period between 1977 to 2008 compared to S&P 500’s returns of 10.8%.

During the 2008 fiscal crisis his fund lost 3% one of the two years in the last 40 to lose money.

In 2016 after a multi year battle with the Argentina government he won 2.4 billion for his investors, something that a index fund would never worry about as long as they got the same payout as anyone. It is this type of actions that will never be undertaken when the market goes passive. To blow off a point made by a man with a very large intellectual understanding of financial markets is the very point he was describing.

 

[jollystomper]

At the core of most of these is the false premise that passive investing can reach close to 100% of all investing. This is impossible; humans have 100K years of breeding where greed and optimism were rewarded by being disproportionately successful in the gene pool. That's why casinos and lotteries will never go out of business.

Gotta agree with this. As long as most people feel they can beat the market, or can convince others that they can beat the market, indexing will never gain a large share of all investing. When they start shutting down casinos and lotteries due to lack of business, then I will get worried.

The other thing is... some of us reach the point where we are not interested in beating the market. I look less at "did I beat the market" and more at "did my gains meet what I want/need to live comfortably?"

 

[Which Roger]

I think the opposite is true. Passive investing is better for the economy than is active investing.

Argument 1: I index because I believe that the market is smarter than I am, and smarter than any other individual. So by indexing, I'm buying the "right" amount of each company's stock, i.e., my investment decisions are as optimal as they can be. If I were an active investor, since I'm not as smart as the market (nor would be my fund manager), I would be making sub-optimal investments, putting too much money in the wrong places, and not enough in the right places.

Argument 2: Indexing puts more of my money to work. If I invest 10 grand in an index fund, I'm purchasing about $9995 worth of stock and giving $5 to the investment manager. If I invest 10 grand in an actively-managed fun with a 1% expense ratio, just $9900 is going into the market, and $100 is going into somebody's pocket.

 

[RE2Boys]

I’m essentially an index fund (low fee fund) investor. I never thought of myself as someone who is devouring capitalism (though I have wondered what will happen if a very large fraction of investors were indexers). So do we need to do our patriotic, or whatever, duty and pay higher fees in order to save the system?!

Hey, I'm doing my patriotic duty by trying to pick the winners and losers and effect stock pricing by dabbling in individual stocks!

 

[NW-Bound]

Ah, there's a thread like this just a few days ago. And there was one a month or two ago.

What I want to add: Things are never as simple as people want to believe.

Some earlier posters brought up the issue of corporate governance. I recall some time around 2008 time frame if memory serves, Bogle was at a conference of money managers, and he brought up the issue of corporate governance, and that money managers should use the voting rights of the shares they hold to curb corporate shenanigans, abuses of power by CEOs and their often ridiculous compensations. Some money managers commented that why they should bother. If they are active investors, they will just sell the bad company. If they are indexing, they just let the matter runs its course as some others do the dirty work. Bogle tried to get them to be more interested, saying that they should be the "invisible hand" in Adam Smith model to force changes for the better.

I tried to search for that article, but have not found it. Instead, I found an interview with Bogle in 2010 with Morningstar on the same topic. Here's an excerpt.

Interviewer:"... if indexing continues to gain traction as it has, does that sort of run at odds with the idea of governance and if the corporation knows that the passive investor doesn't have that ultimate weapon of walking away, can it just really ignore the index fund's wishes?"​

Bogle replied that an index investor cannot just sell, and he has more reasons to get involved with corporate governance. He then admitted that index investors in reality just did not care.

Bogle: I have to tell you this, which is very disappointing, someone – I think it was a reasonable survey – took a look at all mutual fund managers to see how, what kind of scores they got in terms of activism in governance, and right at the bottom of the list were the three large index fund firms, and that would be Vanguard, that would be State Street and that would be BlackRock.​

 

[Red Badger]

The comments about last quarter's results have zero meaning. I would hope people here would have some respect for a man of Mr Singer's talents, he is a risk averse stock picker never using leverage.


During the 2008 fiscal crisis his fund lost 3% one of the two years in the last 40 to lose money.

In 2016 after a multi year battle with the Argentina government he won 2.4 billion for his investors, something that a index fund would never worry about as long as they got the same payout as anyone. It is this type of actions that will never be undertaken when the market goes passive. To blow off a point made by a man with a very large intellectual understanding of financial markets is the very point he was describing.

Respectfully, I choose to disagree. He may be the "hot horse" at the track, but, like many here, I'll stay with the proven ability of index funds to beat active management ~92% of the time over the long haul. So, I took a bit of umbrage when he made such disparaging comments about index funds. For many smallish 401K investors (like me), index funds are the surest (and safest) way to freedom.

 

[jazz4cash]

I doubt if it matters. There will always be plenty of investors who think they can beat the index on their own. It never seems to go out of style. I wouldn't worry about it. Besides, what is Mr. Singers motivation for going public with his opinion? I doubt he has the good of the public in his thoughts.

I saw this discussed on CNBC today. The best summary IMO given by Josh Brown (aka The Reformed Broker) was essentially what you've stated above:

Human nature/desire to be above average will prevent a majority of investors from sticking to a passive strategy.

also​

There is an huge misconception that INDEX=PASSIVE and that's just not true. (This is a pet peeve of mine). Many index investors are timing the market and using other strategies like sector rotation, hedging, etc.,etc.

 

[Running_Man]

I saw this discussed on CNBC today. The best summary IMO given by Josh Brown (aka The Reformed Broker) was essentially what you've stated above:

Human nature/desire to be above average will prevent a majority of investors from sticking to a passive strategy.

also​

There is an huge misconception that INDEX=PASSIVE and that's just not true. (This is a pet peeve of mine). Many index investors are timing the market and using other strategies like sector rotation, hedging, etc.,etc.

Passive refers to the portfolio management NOT the individual investor in the fund. Most indexes are passive by design, not active. The passive vs active is not a arguement about investor types it is INVESTMENT types

 

[flintnational]

It appears the internet may have accelerated the adoption of good ideas. In general, people are rapidly learning active management typically (not always) does not cover the cost of fees. This quote from the article speaks volumes about the manager's concern.

"Almost $500 billion flowed from active to passive funds in the first half of 2017. "

It does raise the possibility in the future, if the manager is correct about actives ability to influence management, that "good active" management could excel since his competition may be limited. But so far, I have not seen the evidence of broad out performance. I have only seen active out performance in hindsight.

 

[ulrichw]

I think many of you are missing the point.

Singer didn't make a statement on whether passive investment yields good or bad returns compared to other forms of investment.

His thesis (as quoted from the article) is: "In a passive investing world, small shareholders have little-to-no voice and no realistic possibility of banding together, while the biggest shareholders have no (repeat, no) skin in the game so long as the money manager does not underperform the index"

So rather than being an argument on performance this really is a corporate governance argument, as NW-Bound brought up.

Basically, if you agree with this thesis, and believe that shareholder votes are important to companies' performance, passive investing is a threat, because it may diminish the power of shareholders to influence corporate operations.

The real question is how the managers of passive funds allocate their votes. NW-Bound provides some disturbing evidence that Singer's premise (i.e., that they don't care) applies.

In this situation, you don't need 100% passive investment before the negative effects are seen - effectively passive investment works to increase the weight of insider votes, so even smaller percentages might have a tangible effect.

 

[YVRRocketSurgery]

I think many of you are missing the point.

Singer didn't make a statement on whether passive investment yields good or bad returns compared to other forms of investment.
...

+1

 

[meierlde]

I think many of you are missing the point.

Singer didn't make a statement on whether passive investment yields good or bad returns compared to other forms of investment.

But for most investors good enough returns after the fees is the goal. I do hold a number of stocks but typically such a small portion that I don't bother to vote them. (the percent of each company is so vanishingly small that most of the time it would not make a difference. Only if a proxy contest is involved do you get options. After all most corporate board elections are run on the soviet model of one candidate for each job, except that not voting is quite ok. (talking about 100 to 200 shares each)

 

[Toddtheformeraccountant]

Even if 90% of people went passive investing, to the extent that the individual stocks prices weren't reflective of true value because there wasn't enough trading, it would attract more people to swoop in and take advantage of it by shorting or buying, and reach an equilibrium. always reach an equilibrium. This is nothing to lose any sleep over, there will always be enough active traders to get sufficient price discovery on all individual stocks.