Gotham's Greenblatt Sees Opportunities Amid Shift to Index Funds

  • Passive investing suits some, but isn’t discerning, he says
  • Investors can win by zigging when market zags, Greenblatt says

The shift to passive strategies that hug stock market indexes is likely to continue, but that’s not all bad for active stock pickers, said Joel Greenblatt, the co-chief investment officer of Gotham Asset Management.

"When people aren’t discerning among stocks that have different fundamentals, you can create opportunities,” he said Wednesday at the Bloomberg Invest New York summit.

Greenblatt, who’s written popular investing books and has been managing money for decades, is joining a chorus of active money managers signaling the potentially distorting effects of index funds on markets. Earlier this year, Seth Klarman, who runs the $30 billion Baupost Group, said that the tilt to passive investing will make markets more inefficient. In April, the managers of FPA Capital Fund called index trackers “weapons of mass destruction” because they led investors to blindly purchase securities.

Warren Buffett has taken a different stance, encouraging more people to put money into passive funds. While the billionaire continues to invest actively at his conglomerate, Berkshire Hathaway Inc., he devoted a lengthy passage in his annual letter to shareholders this year to explaining his view that active managers had wasted their clients’ money. The billionaire praised Jack Bogle, the Vanguard Group founder and a pioneer of index investing, as a “hero.”

Greenblatt said on Wednesday that he agreed with Buffett: Most people would be better off in an index fund. But the Gotham money manager said that investors who find active strategies can do all right if they don’t buy and sell at the wrong times.

“The big picture is that the strategy that makes most sense for you is not only one that makes good sense but one you can stick with,” Greenblatt said. “The problem with active management, in general, is that to beat the market you have to do something different than the market. You have to zig and zag differently.”

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