Paul Singer says passive investing is ‘devouring capitalism’

NEW YORK: 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 27. “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 US$500bil 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.

“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 under-perform 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% in the second quarter, bringing gains for the first half to 3.5%, 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. — Bloomberg