Billionaire Paul Singer warns of a growing and menacing threat: passive investing

Billionaire Paul Singer is warning of a growing and menacing threat: passive investing.

“Passive investing is in danger of devouring capitalism,” Singer wrote in his firm’s second-quarter letter dated July 27th. “What may have been a clever idea in its infancy has grown into a blob which is destructive to the growth-creating and consensus-building prospects of free market capitalism.”

Almost $500 billion flowed from active to passive funds in the first half of 2017. The founder of Elliott Management Corp. contends that passive strategies, which buy a variety of securities to match the overall performance of an index, aren't truly "investing" and that index fund providers don't have incentive to push companies to change for the better and create shareholder value.

Elliott, whose main hedge funds manage $33 billion, is best known for its high-profile activist and distressed wagers, including leading a group of holdout creditors seeking repayment for positions in Argentine debt. One of Singer's most recent campaigns -- a bid to buy power distributor Oncor Electric Delivery Co. -- has pitted him against billionaire Warren Buffett.

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No voice

“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,” the letter said. There’s a real likelihood that passive investing “and its apparent stability, is unsustainable and brittle.”

Singer’s Elliott Associates fund rose just 0.4 per cent in the second quarter, bringing gains for the first half to 3.5 per cent, according to the letter. While it made money in bets on distressed securities during the quarter, the fund lost on commodities and portfolio protection related to interest rates, equities and credit.

In a wide-ranging letter that touched on topics from safe spaces to infrastructure spending, Singer said the fund was trying to navigate “uncharted waters” amid continuing accommodative monetary policy. The letter said that while economic optimism stemming from the Trump administration’s pro-business agenda may contribute to rising markets, central bankers probably played a bigger role. A de-linkage of stock and bond prices may be coming soon, if an expanding economy spurs inflation, making yields unsatisfactory to investors. Growth and inflation may climb together if rising rates are seen as a sign of confidence in the economy.

Bloomberg