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Vanguard Is Growing Faster Than Everybody Else Combined

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Re: Vanguard Is Growing Faster Than Everybody Else Combined

#351

Post by jalopy »

jalopy wrote: post #220
bluGill wrote: post #211

Earlier quoted context omitted.

Actually Vanguard claims they care more: active investors will get out if things go bad - they might even make decisions that are good short term bad long term. Vanguard is in for the long term so they care more. One of the things Vanguard can do is ensure good management is in place.

But then that would be active management. This is something Vanguard expressly does not do.

By "active management" I mean actively taking a role in shaping company management, board makeup, corporate governance, say on pay, etc.

While Vanguard may vote all their shareholder proxies, they almost always vote along with the recommendations of management - practically never holding management accountable.

Proof: Take a look at their actual voting record on the S&P 500 fund https://about.vanguard.com/vanguard-proxy-voting/supporting-...

Re: Vanguard Is Growing Faster Than Everybody Else Combined

#352

Post by md_ »

ctkrohn wrote: post #262
malchow wrote: post #197

Earlier quoted context omitted.

Say more. Why do I believe in the Capital Asset Pricing Model and Efficient Markets (both proven wrong) if I invest in Vanguard's cheap S&P 500 ETF? I invest in their S&P 500 ETF because it's the cheapest way to get diversified exposure to the 500 largest American companies, and I believe that the 500 largest American companies will be more valuable in the future as a combination of valuation, scale, and cash flows t…

If the Efficient Markets Hypothesis (in its stronger forms) is false, there should be managers who are able to identify the cheapest stocks within the S&P 500 and thereby outperform the index. A disbeliever in EMH should look to identify these managers and pay them some fee, rather than simply investing in the index and trying to minimize fees. I think it's plausible that these managers exist, but they're impossible…

> I think it's plausible that these managers exist, but they're impossible to identify ex ante. Furthermore, a smart manager will charge fees that are equal to the alpha they generate.

Why would they? Unless they're so rare that there are only a few of them, one would expect the market to encourage "fair" pricing of active management--yet a key dogma of passive investing is that the market is generally efficient, but the market for actively managed mutual funds isn't!

It seems more plausible to me that (handwavy):

1. People can, in fact, beat the market, with lots of effort (e.g. very large college endowment funds, which outperform smaller ones, presumably by spending more on management and research)

2. The barriers to entry are typically high (because most investors won't trust their money with someone with an unproven track record)

3. Those high barriers to entry both allow the few established genuinely successful fund managers to charge higher fees than otherwise (to your point, eating up the alpha they generate) and ensure that "managing a fund" requires good sales skills and not just good management skills (see, lots of hedge funds)

Or, in short, lots of markets are inefficient--both the stock market and the market for managed funds. But because the stock market is much bigger than the fund market, it's probably _less_ efficient. Or so we hope.

Re: Vanguard Is Growing Faster Than Everybody Else Combined

#353

Post by hyperpape »

milesvp wrote: post #323
hyperpape wrote: post #297

Earlier quoted context omitted.

What makes indexing worse in the short term?

To expand on random_comments mention of volatility. Volatility is a big deal. Stock markets can be expected to beat inflation by several percentage points over the "long run", but "long run" is often defined in economics as "greater than your life expectancy". So there's a chance that you'll have to pull money out before it has a chance to grow, or worse, after it's lost a lot of value. Generally you should avoid put…

Hah, had my blinders on. I was trying to figure out how there was an argument for active investing in the stock market in the short term, not comparing against bonds and whatnot.

Re: Vanguard Is Growing Faster Than Everybody Else Combined

#354

Post by ajdlinux »

thisisit wrote: post #121
jordanthoms wrote: post #114

Earlier quoted context omitted.

I was referring more to control of Vanguard itself - i.e. choosing the Board of directors for Vanguard. I did a bit of digging though, and it seems they are actually elected by the shareholders of Vanguard funds - but they are appointed for lifetime terms, and up to 1/3 of the directors may be appointed by the other directors. So they only need to go to a vote of shareholders occasionally - looks like the last was in…

That is one of the major concerns regarding indexing and Vanguard in general. The process for selecting directors in Vanguard indirectly affects the proxy voting for corporate governance in stocks owned by the fund. Many people think it will lead to lower competition because of the objective of the fund is to keep in line with the market and not beat it.

FWIW I can't say I'm terribly happy with Vanguard's environmental proxy voting record...

Re: Vanguard Is Growing Faster Than Everybody Else Combined

#356

Post by fowl2 »

solaarphunk wrote: post #141
headmelted wrote: post #125

As a Vanguard customer, I can understand why people are so enthusiastic about their products, and have known for a while that passive investment, and Vanguard in particular, was growing while active management was on the decline. At no point did I think the difference in inflows was anywhere close to 8.5x. And it does worry me. I'm familiar with the contention that even having some active players in the market will a…

ETFs can be arbitraged much more efficiently due to creation/redemption features. There are market markers like Jane Street who do a ton of this. The more risky effect is that all stocks in an index become more correlated with it over time, leading to larger jumps in single names around earnings seasons when real information is released to the public.

well presumably in a market based on fact, changes should be focused around when information becomes available, right?

Re: Vanguard Is Growing Faster Than Everybody Else Combined

#357

Post by MR4D »

headmelted wrote: post #125

As a Vanguard customer, I can understand why people are so enthusiastic about their products, and have known for a while that passive investment, and Vanguard in particular, was growing while active management was on the decline. At no point did I think the difference in inflows was anywhere close to 8.5x. And it does worry me. I'm familiar with the contention that even having some active players in the market will a…

Your last sentence is terribly wrong, and unfortunately, many people share that mistaken view. Let me explain...

Active managers go around with the notion that as they die off to be replaced by index funds, that there there will be no price-finding.

But here's the thing - before managers, and before mutual funds, most people were buy and hold investors. There was very little "price discovery" compared to today, as most stocks sat on a shelf (literally, as people had paper certificates for the shares they owned).

In that world, the price discovery function was quite small, but clearly adequate.

Today, there are many highly-paid managers who "actively" manage money. ( I challenge the "actively" portion, because many are closet-indexers. If you google "active-share", you can find more about this.) But even if they aren't closet indexers, in any given year, most cannot beat their benchmark. When they can't beat their benchmark (which, ironically is an index), they are inefficient.

That statement bears some emphasis - When Active managers cannot meet or beat their benchmarks, they are __REDUCING__ the market's efficiency. Put simply, they were wrong on what they thought the correct price should be, thereby hindering price discovery.

Read that last paragraph again - it's extremely important. Also, note that there are many people on Wall Street who are highly compensated, and afraid that their jobs will go away because of indexing (note that the S&P 500 is only one index - there are hundreds of others, including MSCI and Russell indexes). They are right to be concerned. After all, as in anything in life, if you can't keep up with the benchmark, you will get cut. This happens in professional sports, people in college with poor grades, and anybody in a sales job. And it's been happening in finance since before any of us were born.

One final note: Back in 2001, the US markets moved from fraction pricing to decimalization. In short, the price increments went from 1/16 of a dollar to 1/100 of a dollar (i.e. a penny). That's a six-fold improvement in pricing accuracy. To think that having less active money will destabilize our economy is unfounded.

Re: Vanguard Is Growing Faster Than Everybody Else Combined

#358

Post by slackstation »

kolbe wrote: post #239
Paul-ish wrote: post #208

Earlier quoted context omitted.

Some researchers have looked at the effect of passive investors on corporate governance[1] : > Still, these funds retain the power of voice, the ability to exert shareholder influence on management and governance-related proposals. But critics say passively invested funds, with their lower fees, lack the resources and often the will to monitor their large and diverse portfolios. The Economist calls them “lazy investo…

I don't know how to say this, but I would trust a common sense understanding of human behavior over research. If there's one rule in life, it's that high finance will exploit legal and immoral loopholes to accumulate wealth, and there is plenty of opportunity for that here, despite the rigorous academic studies done by an institution that is highly connected to the people who can profit off of it.

This exact sentiment is exactly how research was born. In large complex systems, a few ideas pop up that take the system in non-intuitive directions; non-linearity of influence of small factors, hidden factors, etc.

Also, I would counter that in a firm, the legal and immoral loopholes that would give one party greater wealth would do so 1) at the expense of other parties inside the firm and 2) run the risk of bad optics / PR to institutional investors who look out for things like this when evaluating a firm.

Lastly, the aggregate of these factors is baked into the return on investment of a stock. In other words, I suspect that might be happening in firms that are making alot of money and providing healthy returns for shareholders. Alot less so at firms that are struggling and not providing much growth.

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