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Hidden Dangers of the Great Index Fund Takeover

bloomberg.com

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Re: Hidden Dangers of the Great Index Fund Takeover

#21

Post by kds3 »

pfortuny wrote: post #15
kds3 wrote: post #6

> Index funds “are great for investors,” says Elhauge, “but part of the reason they’re great for investors is exactly because of the anti-competitive effects.” Elhauge says the trusts of the late 19th century that gave rise to today’s antitrust laws also involved a form of common shareholding. > She might want Coca-Cola to take big risks to crush Pepsi, and invest capital in new products and markets to do so. An inve…

No because that is essential for hedging, and hedging is good.

> hedging is good.

Is it? Article says that it can be bad for customers:

>> José Azar, an economist at the University of Navarra in Barcelona, along with Martin Schmalz and Isabel Tecu, showed that airline ticket prices were 3% to 7% higher because big funds owned stakes in so many airlines.

Re: Hidden Dangers of the Great Index Fund Takeover

#22

Post by lifeisstillgood »

darawk wrote: post #10

The extremely simple and correct solution here is to not let index funds themselves vote. Only allow the votes to be cast directly by the index share holders. Problem solved, I don't know why people keep hand wringing about this and not suggesting the supremely obvious solution here.

I remember trying to build just this solution about a dozen years ago - the SWIFT integration was achievable but the main stumbling block was it seemed like a marketplace buildout - you needed to get everyone persuaded it was a good idea before it takes off.

Things may have changed

Re: Hidden Dangers of the Great Index Fund Takeover

#23

Post by ellisv »

darawk wrote: post #10

The extremely simple and correct solution here is to not let index funds themselves vote. Only allow the votes to be cast directly by the index share holders. Problem solved, I don't know why people keep hand wringing about this and not suggesting the supremely obvious solution here.

> The extremely simple and correct solution here is to not let index funds themselves vote. Only allow the votes to be cast directly by the index share holders. Problem solved, I don't know why people keep hand wringing about this and not suggesting the supremely obvious solution here.

Something like create a super-voting share class for active investors and regular stock for the index funds?

https://en.wikipedia.org/wiki/Super-voting_stock

Re: Hidden Dangers of the Great Index Fund Takeover

#24

Post by bnchrch »

kds3 wrote: post #11
ellisv wrote: post #8

Earlier quoted context omitted.

> So the way we can solve this problem is to outlaw shares ownership of competing companies? Seems like a fair solution. This just isn't practical. What if I'm invested in Big Bank and Big Tech Co. but then Big Tech Co. creates a wallet app and credit card -- do I have to sell my ownership in one of these companies? As an investor I definitely want to own companies that compete because I don't know which one is going…

> do I have to sell my ownership in one of these companies? No, company would have to split itself (create separated business entity) so you would have to sell your competing part of the company. Such a change can also solve problem of companies using their dominant/monopolistic position in one business area to get unfair advantage in another. > As an investor I definitely want to own companies that compete because I…

> No, company would have to split itself (create separated business entity) so you would have to sell your competing part of the company.

How about categories that aren't cut and dry? Lets say the tech company develops an AI tool that banks could apply to track delinquent accounts. And a bank develops a regular tool to do the same? Is this something that warrants splitting your business? Do both split or just one of them? which one?

How do you police this? What about small companies? What about international companies? What about public funds that hold a bunch of companies?

I'm sorry but while there is clearly a problem to be solved, what you proposed is definitely not the solution.

Re: Hidden Dangers of the Great Index Fund Takeover

#25

Post by doctorpangloss »

kds3 wrote: post #6

> Index funds “are great for investors,” says Elhauge, “but part of the reason they’re great for investors is exactly because of the anti-competitive effects.” Elhauge says the trusts of the late 19th century that gave rise to today’s antitrust laws also involved a form of common shareholding. > She might want Coca-Cola to take big risks to crush Pepsi, and invest capital in new products and markets to do so. An inve…

> She might want Coca-Cola to take big risks to crush Pepsi, and invest capital in new products and markets to do so. An investor who holds both, on the other hand, would prefer that Coke and Pepsi avoid price wars.

> So the way we can solve this problem is to outlaw shares ownership of competing companies? Seems like a fair solution.

Nobody cares about Pepsi and Coca-Cola. Coca-Cola and Apple aren't competing, so if Coca-Cola can somehow be in the same index as Apple, and Apple gets 2x the return as Coca-Cola (which it does), which is what really makes the index look good against an average active picker (who doesn't pick Apple), it's a moot point who's allowed to own which shares in competing companies.

There are two real stories about indices. The first is [1] -- sorting the huge individual winners into different indices so that crappy companies, like Comcast and AT&T, can ride up on the demand for the index they are part of. Then there's [2] -- that most demand for individual stocks is the corporations themselves.

When you buy an individual stock versus an index with that stock, you're really making two bets: (1) a bet that there are an excess of individual stock pickers for this stock than for the indices it is part of, and (2) a bet on how much cash a company can get from consumers (even if it is a B2B company) to spend on buybacks in the long term. When you buy the index, you are betting that an industry or corporate class (e.g. large cap companies) are going to sort winners into the index more favorably and claim large amounts of consumer cash from outside that industry / low camp & mid cap stocks. [3]

There are negative trending industries! See S&P Oil and Gas Exploration. The article is talking about Coca-Cola and Pepsi, which do not create new products, they are marketing companies, it isn't about prices at all for them, it is such an utterly dumb example. She should be talking about two fracking companies, whose stock performance is extremely sensitive to oil prices.

The opposite of what the article thinks is happening: people are exiting common ownership of the companies (e.g. the S&P Oil and Gas Exploration index) that, as common owners, they have the most to gain from anti-trust (e.g. agreeing on a price for gas and oil).

[1] https://en.wikipedia.org/wiki/Communication_services_sector_... [2] https://thesoundingline.com/sp-500-buybacks-now-outpace-all-... [3] there are low and mid cap indices, but nobody ever talks about those outside of trade journals

Re: Hidden Dangers of the Great Index Fund Takeover

#26

Post by kds3 »

ellisv wrote: post #14
kds3 wrote: post #11

Earlier quoted context omitted.

> do I have to sell my ownership in one of these companies? No, company would have to split itself (create separated business entity) so you would have to sell your competing part of the company. Such a change can also solve problem of companies using their dominant/monopolistic position in one business area to get unfair advantage in another. > As an investor I definitely want to own companies that compete because I…

> No, company would have to split itself (create separated business entity) so you would have to sell your competing part of the company. This just isn't practical though. Apple/Google/Amazon/etc would have to be broken up for example. > That's the problem article describes! Such behavior reduces competition and hurts customers. Hedging shouldn't be illegal though. Let me buy both cows and chickens -- even though I d…

> This just isn't practical though. Apple/Google/Amazon/etc would have to be broken up for example.

So happened with Standard Oil and others after antitrust laws were introduced. Was their split bad? Or impractical?

Don't you as a customer want Google and other companies to be splitted to AdWords, GoogleSearch, YouTube, Android, Waymo companies?

Re: Hidden Dangers of the Great Index Fund Takeover

#27

Post by fredophile »

kds3 wrote: post #6

> Index funds “are great for investors,” says Elhauge, “but part of the reason they’re great for investors is exactly because of the anti-competitive effects.” Elhauge says the trusts of the late 19th century that gave rise to today’s antitrust laws also involved a form of common shareholding. > She might want Coca-Cola to take big risks to crush Pepsi, and invest capital in new products and markets to do so. An inve…

What if I believe that the overall market for cola beverages will increase but don't want to place a bet on a specific company? In that case it makes sense to buy both Coke and Pepsi.

Re: Hidden Dangers of the Great Index Fund Takeover

#28

Post by mushufasa »

darawk wrote: post #10

The extremely simple and correct solution here is to not let index funds themselves vote. Only allow the votes to be cast directly by the index share holders. Problem solved, I don't know why people keep hand wringing about this and not suggesting the supremely obvious solution here.

I built a site for people to do this

www.yourstake.org

Re: Hidden Dangers of the Great Index Fund Takeover

#29

Post by pilord8 »

darawk wrote: post #10

The extremely simple and correct solution here is to not let index funds themselves vote. Only allow the votes to be cast directly by the index share holders. Problem solved, I don't know why people keep hand wringing about this and not suggesting the supremely obvious solution here.

This is de facto already somewhat the case - most index funds lend out their shares to earn some additional income, and so they can't vote those shares.

However, this becomes a bigger issue as index funds gain additional scale. As shares owned by index funds further surpasses the number of shares demanded for borrowing, index funds will be left with more shares to vote.

This will likely reduce shorting costs and increase total shares sold short somewhat, but likely not enough to compensate for the additional index fund ownership (i.e., index funds will net still have more shares for voting).

Re: Hidden Dangers of the Great Index Fund Takeover

#30

Post by lowracle »

darawk wrote: post #10

The extremely simple and correct solution here is to not let index funds themselves vote. Only allow the votes to be cast directly by the index share holders. Problem solved, I don't know why people keep hand wringing about this and not suggesting the supremely obvious solution here.

That doesn't solve the big part of the problem which is the co-ownership of competing companies. A blackrock manager voting for you or you voting doesn't change anything. Through the fund, you co-own multiple competing companies, therefore you won't vote for policies that would increase competition between those companies.
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