Passive Investing The Unforeseen Dangers

Today we hear that Morningstar points out that many investors appear to be transitioning from actively managed mutual funds to passively managed funds, "The public may be losing interest, but it is not losing heart". Indeed the public's interest in passive funds has paved the way for a big rise in the number of financial indexes, according to a senior analyst at Sanford C. Bernstein & Co. We now have the bizarre situation that there are more indices than there are large cap stocks, clearly this explosion of investment vehicles is unsustainable.

Here at Fidelibus Lucrum we know investors have a short-term and fickle mentality when it comes to investing, back in the height of the financial crisis when the daily press printed alarming headlines like these.

Money Fund, Hurt by Debt Tied to Lehman Brothers, ‘Breaks the Buck’
(The Wall Street Journal , Sept. 17, 2008 12:01 a.m. ET)
In a sign of how the financial crisis is hitting small investors, a huge money-market fund, The Reserve Primary Fund, announced Tuesday that it lost money as its net asset value fell below the hallowed $1-per-share level, the first time one of these conservative funds has had a loss in 14 years. Therefore the Reserve informed investors that they are disallowing redemption requests for the International Liquidity Fund from September 16, 2008..........

And more recently after Brexit, redemption facility temporarily suspended, and then overnight several fund’s assets devalued by 30%.

Number of UK property funds suspended since Brexit vote doubles
(Reuters Thu Jul 7, 2016 1:37AM. BST)
The number of British property funds suspended after the country's vote to leave the EU more than doubled, leaving over 18 billion pounds frozen in the biggest seizing up of investment funds since the 2008 financial crisis. Seven funds have pulled down the shutters after a wave of investors asked for their money back. "These funds are therefore likely to be closed for weeks and months rather than simply a matter of days," a manager wrote in a note to clients before Aberdeen's announcement. Britain's Financial Ombudsman Service said it had begun to receive calls from retail investors worried about the closures and the potential hit to their savings. "Although the decision to suspend redemptions was expected, the extent of the suspensions by the three funds so far is quite troubling," a spokeswoman said shortly before Wednesday's fund announcements..........

Eventually weeks after the funds did open again but issued punishing redemption clauses as in the case of BlackRock Inc, the world's largest asset manager, told investors that it raised quarterly redemption charges on its 3.3 billion pounds BlackRock UK Property Fund to 5.75 percent, from 2 percent.

What investors fail to recognize, there's unforeseen systemic risk and many hidden exemptions in the small print of the funds Indenture that investor’s unfortunately only find out when it’s too late to do anything about it, “it’s Only When Everyone Runs for the Exit” they realize their trapped.

Try to imagine when the global debt load of $247 trillion or nearly three times the size of the entire global economy implodes and everyone runs for the exit.. Good luck!! passive investors getting any of your money back.

Here at Fidelibus Lucrum were we exercise "Proactive Management", subsequently proactive investors are only a mouse click away from liquidating or moving all or part of their investments to safer assets should and when it be necessary.

The Manager, Fidelibus Lucrum, Pooled Investment Club.
29 September 2016. 08.10 Eastern.