Several index fund managers may soon control every publicly traded company

Discussion in 'Wall St. News' started by guru, Dec 2, 2018.

  1. guru

    guru

    https://www.fool.com/amp/investing/...founder-warns-that-index-funds-could-bec.aspx

    A small number of index fund managers could soon control every publicly traded company.

    Jordan Wathen
    Vanguard founder Jack Bogle is worried that the index fund, a way to invest that he popularized, may become "too successful for its own good," fearing that the beast he unleashed onto the financial world may give just a handful of investment companies control over every corporate board and shareholder vote.

    Over time, the percentage of all assets owned by index funds has only increased. Index funds now control 17.2% of U.S.-listed companies, up from 3.5% in 2000. In an article for The Wall Street Journal, Bogle wrote that the share of assets held by index funds will almost certainly increase, and that could create problems for investors and the "national interest" alike.

    When index funds own half the market
    The nature of index funds is that assets cluster in funds managed by only a few asset managers. The so-called Big Three, which include BlackRock, State Street, and Vanguard, together manage funds that make up 81% of all indexed assets.

    Because the primary advantages of index funds are cost and liquidity, investors flock to the largest funds, which are most liquid and can charge the lowest fees because of their scale. Bogle worries about what will happen when index funds own half the market, a point at which the Big Three's funds could own as much as 30% of all U.S.-listed assets.

    If the three largest index fund managers were to control 30% of U.S.-listed companies, they would have almost unprecedented power, particularly when it comes to matters put forth for shareholder vote, such as the addition of certain board members or whether a company should agree to a buyout offer. Index funds wouldn't just track the market; they would control the market.

    If you own individual stocks in your own portfolio, you have the right to vote on important issues affecting the companies you own. However, if you own stocks indirectly through an index fund, the fund's manager votes on your behalf. In a world in which BlackRock, State Street, and Vanguard control 30% of the vote, they could effectively swing the vote on every single shareholder decision.

    Sharing others' concern
    Bogle isn't the only influential investor to sound the alarm. In 2015, Charlie Munger of Berkshire Hathaway fame warned investors that "index funds will be permanent owners who can never sell." He added that "that will give them power they are not likely to use well."

    Value investor Mario Gabelli has made similar statements, suggesting that index funds weaken corporate governance because they often support the interests of management when casting shareholder votes. Funds are required to detail how they vote in Form N-PX filings with the SEC, but outside academia and the offices of large fund investors, few people bother to look. Investigating how a fund manager votes is almost the antithesis of the "hands-off" style of investing that index-fund investors enjoy.

    In recent years, index creators have moved to cement index funds' control over the markets. S&P Global owns the S&P 500 name, licensing the index to funds that track it. Last year, it made a controversial decision to disallow photo app company Snap from joining the S&P 500 because it has a multiclass shareholder structure that puts 96% of voting power in the hands of its co-founders, Evan Spiegel and Robert Murphy. The implicit message: Hand over voting power to our customers (index fund managers) or else.

    Making good funds better
    Bogle is still a proponent of index funds -- and he should be. It's true that index funds have revolutionized the investing world by reducing expenses and tax drag, putting more of the stock market's return in the hands of investors rather than asset managers and Uncle Sam.

    But for all the good that index funds have created, the concentration of power among a few fund managers could prove detrimental. Bogle wrote that "public policy cannot ignore this growing dominance, and consider its impact on the financial markets, corporate governance, and regulation."

    With index funds' share of assets doubling every decade, it won't be long before we see if, in the world of investing, one can truly desire too much of a good thing.
     
    dealmaker and themickey like this.
  2. pipeguy

    pipeguy

    This is because large capital entered trajectory where it multiplies itself much faster than we do with our modest incomes. Further multiplication needs resources for that, i.e. sources of interest that's why it tends to be more overwhelming and concentrated.

    Eventually the system starts to degrade because concentration is a loss of flexibility it will break up and start over.

    Creative destruction.
     
    Antikythera likes this.
  3. Sig

    Sig

    Pretty sure each of the index funds have voting rules that bind the fund managers, they can't just go activist investor if they get a wild hair up their behind.
     
  4. newwurldmn

    newwurldmn

    Probably to go with whatever ISS recommends.
     
  5. Specterx

    Specterx

    Sort of a tricky problem. Fund companies are expected to perform oversight but there's nobody making sure they do it well, and no incentive to spend real money on analysts etc. while there's a major incentive to cut costs so fees can be as low as possible.

    The best solution is probably management compensation which pays out based on long-term shareholder value creation, with the board ensuring that accounting and compliance rules are being followed etc. more so than overseeing corporate strategy. Active managers will then provide the feedback as to whether management is doing well or poorly.
     
  6. Sig

    Sig

    Actually fund companies aren't expected in most cases to provide oversight. In almost every prospectus the fund company explicitly states this. The main exception to this would be activist funds where that is there investment thesis, otherwise almost universally funds have a policy in place and in the prospectus to either vote with what the board recommends or abstain from voting/vote present.
     
    murray t turtle likes this.
  7. %%
    I thought they were going to note that WSJ article ; instead they were reading ''fool.com'' LOL .:D:D NOT an insult -that is the co name. LOL-LOL
     
    ironchef likes this.
  8. ironchef

    ironchef

    We are fellow fools. :D
     
    murray t turtle likes this.
  9. %%
    I like a good joke;
    but not to be confused with a full time joker LOL. Partial disclosure; i read WSJ + IBD/investors.com much more than ''fool.com'' :D:DLOL-LOL
     
  10. ironchef

    ironchef

    But WSJ and IBD both require subscriptions so I have no access. fool.com is free.:D:thumbsup:

    I suppose you get what you pay for.
     
    #10     Dec 3, 2018
    murray t turtle likes this.