- Wall Street legend Peter Lynch said passive investors are missing out on market-beating returns.
- Michael Burry of “The Big Short” warned the boom in index funds and ETFs is a dangerous bubble.
- Burry said the passive-investing trend is hurting small value stocks and shareholder activism.
Fabled stock-picker Peter Lynch recently criticized the shift toward passive investing, warning buyers of index funds and exchange-traded funds that they’re losing out on superior returns. Michael Burry, the investor of “The Big Short” fame, has also complained about the trend and cautioned it could be disastrous.
“This move to passive is a mistake,” Lynch, who delivered an annualized return of 29% over 13 years as the manager of Fidelity’s Magellan fund, said in a Bloomberg Radio interview that aired this week.
“People are missing the boat,” he added, noting that he expects the best active managers to consistently trounce the market.
Meanwhile, Burry called the passive-investing boom a “bubble” in a Bloomberg interview in 2019. The Scion Asset Management boss observed that the trend was sapping interest in smaller, undervalued securities around the world.
“There is all this opportunity, but so few active managers looking to take advantage,” he said.
Burry also suggested the dearth of active managers was stifling shareholder activism. Passive managers tend to be less confrontational with company executives, whereas Burry wrote several letters to GameStop’s directors in 2019. He called for a board overhaul and criticized its executives’ compensation, acquisitions, and lack of share repurchases.
The Scion chief revisited the subject of passive investing in a September tweet. He warned the flood of millennial money into index funds and ETFs was fueling unsustainable valuations and putting the stock market in a precarious position. “Parabolas don’t resolve sideways,” he said.
Burry shot to fame for calling the mid-2000s housing bubble and making a fortune by betting on a crash. The contrarian investor also took short positions against Elon Musk’s Tesla and Cathie Wood’s Ark Innovation ETF earlier this year. Moreover, he invested in GameStop back in 2019, laying the groundwork for the short squeeze on the stock at the start of this year.
It’s hard to say whether Lynch and Burry are right about the downsides and risks of passive investing, but there is a clear shift from active to passive. The value of passively managed US assets has ballooned from $US3.1 ($AU4) trillion at the end of 2016 to $US7.5 ($AU10) trillion today, whereas the value of actively managed US assets has only grown from $US3.7 ($AU5) trillion to $US6.1 ($AU9) trillion over the same period, Bloomberg data shows.