‘Big Short’ Seer Spies New Bubble: Index Funds

Result: Small-cap and value stocks end up neglected, Michael Burry says.

Back during the housing boom, contrarian hedge fund manager Michael Burry detected trouble in subprime mortgages. So he shorted these low-end home loans via credit default swaps and reaped a bonanza when the housing bubble popped in 2008.

These days, his Scion Asset Management ($343 million in assets) has found a new set of popular assets to disdain: index funds. He thinks they have grown too large and are obscuring great bargains in small and value stocks. Moody’s projects that passive investments will overtake active ones in two years.

“The bubble in passive investing through ETFs and index funds as well as the trend to very large size among asset managers has orphaned smaller value-type securities globally,” he told Bloomberg in an email. Small-caps and value-oriented shares have suffered in the current bull market, as major tech names like Facebook and Apple pulled indexes ever higher.

Note that Burry is not predicting the demise of passive investing, which is growing more popular all the time with investors, who were burnt during the financial crisis because they picked stocks or depended on active managers to do it for them.

Burry came to prominence in Michael Lewis’ 2010 book, “The Big Short,” which recounted how he and the other negative prognosticators bet against the inflated housing industry and made a pile. In the movie version, Christian Bale played Burry, a role that earned Bale a best-supporting actor Oscar nomination.

Burry has sold Facebook shares, according to the Whalewisdom asset tracing site. At the same time, he is taking positions in smallish South Korean stocks. 

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