Index funds have been “bumping up” the prices of all stocks in the major indexes as managers put “record amounts of shareholder money to work,” says an article in last week’s Institutional Investor. This has created a bubble that could spell trouble for passive investors but present opportunities for active ones.
John Rogers, CEO of $2 billion Ariel fund, said that when the downturn occurs, the “mindless selling that index funds must do” will allow active managers to shop for values, and investors will be “shocked” by how much they paid for securities simply because they were part of a benchmark. Ariel said, “The next ten years will be a great period for the stock picker.”
Robert Bacarella, co-manager of the Monetta Fund, “gave up fighting passive ten years ago,” by creating a hybrid fund composed of equal parts passive and active. “You don’t need to hit home runs,” he argued, noting that funds only have to beat the benchmark by 1.45% annually to be in the top quartile for performance. He compared the two investment approaches to flying a plane: “An airplane pilot uses autopilot for a good part of the trip; that’s passive investing. The pilot gets involved during turbulence; that’s active.”