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Bogle Sounds a Warning on Index Funds

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Re: Bogle Sounds a Warning on Index Funds

#31

Post by dumb_troll »

zAy0LfpBZLC8mAC wrote: post #20

(Index) funds solve a problem that we shouldn't really have anymore. The problem is that (semi) manually trading securities is inherently expensive. Funds solve that problem by massively reducing the number of transactions that are required: 1000 people investing in a fund investing in 1000 companies needs 2000 transactions instead of the 1000000 transactions needed when 1000 people invest in 1000 companies directly.…

What about the problem that retail investors necessarily don't have good insights about individual companies (or stock pickers) but still want to benefit from economic growth?

Re: Bogle Sounds a Warning on Index Funds

#32

Post by gammateam »

gregorymichael wrote: post #2

A bit click-baity, but the warning here from the father-of-index-funds is not that they've become a bad investment, but that their popularity is leading toward a handful of financial institutions holding controlling interests in most of the largest companies. Pretty interesting unitended consequence.

> but that their popularity is leading toward a handful of financial institutions holding controlling interests in most of the largest companies.

Which allows for them to do things like demand publicly traded recruit women to their boards. Which is a useful talent when you are focused on economic growth, and your holdings are focused on extreme paper-meritocracy that fails to result in actually addressing additional portions of a market because their talent pool can't perceive it.

https://newsroom.statestreet.com/press-release/corporate/sta...

oh no the potential.

Re: Bogle Sounds a Warning on Index Funds

#33

Post by dasil003 »

gammateam wrote: post #32
gregorymichael wrote: post #2

A bit click-baity, but the warning here from the father-of-index-funds is not that they've become a bad investment, but that their popularity is leading toward a handful of financial institutions holding controlling interests in most of the largest companies. Pretty interesting unitended consequence.

> but that their popularity is leading toward a handful of financial institutions holding controlling interests in most of the largest companies. Which allows for them to do things like demand publicly traded recruit women to their boards. Which is a useful talent when you are focused on economic growth, and your holdings are focused on extreme paper-meritocracy that fails to result in actually addressing additional…

Right, because when shadowy groups get unimaginable leverage and power the first thing they do is apply affirmative action pressure to address gender imbalances.

Re: Bogle Sounds a Warning on Index Funds

#34

Post by soVeryTired »

mcguire wrote: post #29
gregorymichael wrote: post #2

A bit click-baity, but the warning here from the father-of-index-funds is not that they've become a bad investment, but that their popularity is leading toward a handful of financial institutions holding controlling interests in most of the largest companies. Pretty interesting unitended consequence.

How do these financial institutions vote their shares?

Blackrock have a history of rubber-stamping executive pay packages. In the past, they've voted in favour of proposed CEO pay packages in something like 99% of cases. Some people have argued that doing so benefits Blackrock execs themselves because high pay then becomes the norm.

https://www.pionline.com/article/20170418/ONLINE/170419868/b...

Re: Bogle Sounds a Warning on Index Funds

#35

Post by toast0 »

joshgel wrote: post #27
bluGill wrote: post #18

Earlier quoted context omitted.

The risk is because index funds don't do stock analysis (instead they buy and hold all stocks) they will invest in bad companies and prop their price up. Then when the bad company goes bankrupt (as everyone paying attention knows will happen) the index funds are left holding all the stock suddenly worth nothing. Which is to say the traditional more expensive managed funds that actually pay attention to the fundamenta…

I think this is almost true. It would be true if index funds held all the stock. But since they don't and managed funds still exist, the stock price will go down when managed funds decide to sell. When the stock price goes down, the shares become a lower fraction of the index, so the index funds will also sell some. I think the main point is that index funds still rely on traditional market players to effectively all…

The index fund doesn't need to take any action to respond to price movement. When the stock price goes down, the shares become a lower fraction of the index and also a lower fraction of the fund's holdings.

The fund has to manage holdings around fund purchases and redemptions, and when the index changes.

Re: Bogle Sounds a Warning on Index Funds

#36

Post by jschwartzi »

jonbarker wrote: post #21
neogodless wrote: post #14

Maybe I'm misunderstanding something, because I find it odd to hear this from Bogle himself. Vanguard doesn't own or control the equities in their index funds. You do. Vanguard is structured so that you can own your piece of the index fund pie. And while there are large holders of index funds such as Vanguard's Total Stock Market fund, I don't think there are any majority holders. For 51% of equities to be channeled…

The risk is that Vanguard, State Street, and Blackrock, employ small 'governance teams' whose job is to vote on your behalf. Since they don't have an explicit fiduciary duty to the shareholders of the index funds, but do have an implicit one, it can be argued that you don't actually have a vote in how the component companies are run. More here: https://outline.com/njXPEu

Vanguard explicitly asks you to vote your shares. I've gotten letters in the past asking me to cast a vote.

Re: Bogle Sounds a Warning on Index Funds

#37

Post by SilasX »

gregorymichael wrote: post #2

A bit click-baity, but the warning here from the father-of-index-funds is not that they've become a bad investment, but that their popularity is leading toward a handful of financial institutions holding controlling interests in most of the largest companies. Pretty interesting unitended consequence.

Why would that matter? If they are obligated by their funds' charters not to intervene, then all the governance decisions happen exactly as if they hadn't invested, right? 10% vs 90% of share votes being on auto-pilot shouldn't matter?

Is the argument that the vast majority of them could change their funds' charter to allow them to be actively involved with governance? If so, that would be really hard to achieve even if many of them worked at it.

Edit: three people have made the same "it's easier to get a controlling interest" argument. See my reply in the follow-up before making another redundant comment.

Re: Bogle Sounds a Warning on Index Funds

#39

Post by gammateam »

dasil003 wrote: post #33
gammateam wrote: post #32

Earlier quoted context omitted.

> but that their popularity is leading toward a handful of financial institutions holding controlling interests in most of the largest companies. Which allows for them to do things like demand publicly traded recruit women to their boards. Which is a useful talent when you are focused on economic growth, and your holdings are focused on extreme paper-meritocracy that fails to result in actually addressing additional…

Right, because when shadowy groups get unimaginable leverage and power the first thing they do is apply affirmative action pressure to address gender imbalances.

> Right, because when shadowy groups get unimaginable leverage and power the first thing they do is apply affirmative action pressure to address gender imbalances.

Yes, that is exactly what happened, dasil003

https://newsroom.statestreet.com/press-release/corporate/sta...

State Street has 2.7 Trillion AUM

Re: Bogle Sounds a Warning on Index Funds

#40

Post by koboll »

alehul wrote: post #9
brianliou91 wrote: post #3

This is fascinating. Selfishly though this seems to signal for investors of index funds (such as myself) that they will only continue to be good investments unless major government regulation occurs. Does anyone know of any investment risk to index funds if everyone is now doing it?

Index fund investors are classified as "passive investors," while others are "active investors." The main investment risk to index funds growing is that, if everybody is a passive investor, then the passive investors are worse off as there are very few active investors who actually try and value companies appropriately. On the other hand, if the market is littered with active investors, then the market is likely more…

As an "active investor" your competition is HFT algos on servers located as physically close as possible to the stock market in order to achieve superhuman reflexes. Which you have absolutely zero hope of beating.

I'd rather see slower, predictable gains than bet my nest egg trying to go toe-to-toe with hyperefficient machines -- or hand it off to some Manhattan finance bro making that bet on my behalf.

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