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Contrarian Investor Warns of Passive Bubble as Assets Surpass Active

In what media outlets are calling an “epic shift,” assets in passively managed funds beat those in actively managed funds for the first time in modern history, according to a Bloomberg report. Citing Morningstar data, Bloomberg reported that fund flows in August boosted assets in index-tracking U.S. equity funds to $4.271 trillion, compared with $4.246 trillion run by stock-pickers. Investors added $88.9 billion to passive U.S. stock funds while pulling $124.1 billion from active this year through August. Earlier this month a Bloomberg interviewer spoke with Michael Burry who was featured in the movie “The Big Short” for his trades against mortgage securities before the 2008 financial crisis. Burry now sees opportunities for gain in the passive boom and is investing in neglected, smaller value stocks as ETFs and other index-tracking products skewed toward big companies soak up assets. Burry told Bloomberg that opportunities exist in small caps, but few active managers are willing to take advantage. He pointed to liquidity risk underlying the passive boom and told Bloomberg that index fund inflows are distorting prices for stocks and bonds similar to the way collateralized debt obligation purchases did for subprime mortgages before the 2008 financial crisis. The longer the bubble goes on, the worse the crash will be, Burry told Bloomberg.

 
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