DoubleLine’s Roundtable Of Experts Highlight A Big Risk Lurking In The Stock Market

Kevin Mwanza
Written by Kevin Mwanza
currency manipulator stock market
Stock market prices are distorted by index investing — a passive investment strategy aimed at generating returns similar to a broad market index. Investors check stock prices on their mobile phones near a display of the stock market index at a brokerage in Beijing, June 12, 2019. Image: AP Photo/Ng Han Guan

Stock market prices are being distorted by the proliferation of index investing, which is likely to unwind in an ugly way, according to experts.

The topic on the future of indexing came up during the DoubleLine Capital inaugural Roundtable Prime hosted by CEO Jeffery Gundlach. Gundlach noted that the indexation of equities is “the definition of momentum investing”.

“When it comes to indexing, it’s remarkable how the pendulum swings,” said Gundlach, adding that in the 1990s, people sought active management for equities whereas these days people want indexing for their stocks.

Investopedia describes index investing as a passive investment strategy that attempts to generate returns similar to a broad market index.

Although some have raised the question of whether there is enough underlying liquidity in the stock markets, there has been a rotation out of actively managed funds into passively managed indexed equity funds and exchange-traded funds (ETFs).

“You can’t have something that ostensibly is liquid on the surface and yet invest in the yield illiquid. That’s ETFs and other index funds, they’re investing in, particularly in the illiquid,” said Stephen Romick, a portfolio manager with First Pacific Advisors.

Listen to GHOGH with Jamarlin Martin | Episode 68: Jamarlin Martin

Jamarlin talks about the recent backlash against LeBron James for not speaking up for Joshua Wong and the violent Hong Kong protestors.

The founder of Bianco Research, Jim Bianco, pointed out that high-yield or junk bonds offer higher rates than safer, investment-grade debt, simply because they are a riskier bet.

Riskier corporate debt is being day traded by hedge funds, which according to Bianco, is a huge red flag.