Michael Burry of The Big Short fame, has sounded the warning bell around ETFs - and in particular around large cap ETFs. He compares larger ETF index funds and CDOs pre-GFC. Burry seems also to be bullish on a number of opportunities, like smaller-cap ETFs and individual equities, and Korean equities, given the innovative nature of Korean companies. I'd love to hear the group's thoughts. I'm pasting the more relevant components of the letter from Burry to Bloomberg below.
“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,” Burry, whose Cupertino, California-based firm oversees about HK$2.67 billion, wrote in an emailed response to questions from Bloomberg News.
Active money managers have bled assets in recent years as investors rebelled against high fees and disappointing returns -- a trend that prompted Moody’s Investors Service to predict that index funds will overtake active management in the U.S. by 2021. The shift has coincided with a multiyear stretch of underperformance by value stocks and, more recently, by small-caps.
**Smaller U.S. stocks have underperformed large-caps ** “There is all this opportunity, but so few active managers looking to take advantage,” wrote Burry, who was played by Christian Bale in the film version of Michael Lewis’s book on the collapse of the U.S. housing bubble and ensuing financial crisis.
**Read more on the shift to passive from active funds ** While Burry is best known for his bearish wagers, he said his passion is “long-oriented investing in undervalued and overlooked situations.” He said he’s turning to activism in some cases because there’s not a “critical mass of smaller value-seeking active managers like me” and to help companies make themselves more attractive to investors.
This month Burry petitioned GameStop Corp., a video-game seller, and Tailored Brands Inc., a menswear retailer, to buy back stock. Shares of Tailored Brands climbed 7.6% and GameStop 4.9% in New York on Wednesday. Scion also recently increased its positions in two South Korean small-cap companies -- Ezwelfare Co. and Autech Corp. -- and disclosed its intention to engage with management at Autech, a delivery truck and ambulance maker in which Burry’s firm now owns a nearly 10% stake.
Burry said he’s also “watching” developments at CJ Group, a South Korean conglomerate, without providing more details in his email to Bloomberg. Listed preferred shares of CJ Corp. rose as much as 2% in Seoul on Thursday morning.
“Korea has so much potential,” Burry wrote, citing the country’s technological prowess and high education levels. “Yet Korean stocks are almost always cheap, and management teams are to blame because they do not treat shareholders equally as owners.”
**Korean stocks trade below book value, less than half global level ** While activists including Elliott Management’s Paul Singer have recently pushed South Korean companies to boost stockholder returns, the market still trades at one of the most depressed valuations worldwide. The benchmark Kospi index has dropped about 5% this year, compared with a 16% gain in the S&P 500.
“I have seen the mistakes Americans make with activism over the years, especially in Asia,” Burry said. “My first instinct is friendly advice. It may occasionally evolve to a more hostile situation, but that is not what I want. I most want a productive conversation.”
