Bogle Sounds a Warning on Index Funds • Hacker News Board

Re: Bogle Sounds a Warning on Index Funds

#41

Post by gomox » Fri, Nov 30, 2018, 3:53 PM UTC

turc1656 wrote: post #30

I work in this industry. I'm on the indexing side of it, not the ETF/fund side. We obviously have relationships with all the major fund providers, especially the three big names mentioned in the article. And I happen to work for the big dog - S&P. "Why? Partly because of two high barriers to entry: the huge scale enjoyed by the big indexers would be difficult to replicate by new entrants; and index fund prices (their…

I find your comment fascinating but even though I think I understand perfectly what an index fund is, I don't quite understand what it is that S&P sells for so much money.

Could you clarify this for me? I.e. who buys from you, and what is it they buy?

Re: Bogle Sounds a Warning on Index Funds

#42

Post by travisp » Fri, Nov 30, 2018, 3:54 PM UTC

jschwartzi wrote: post #36

jonbarker wrote: post #21

Earlier quoted context omitted.

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.

Vote on mutual fund governance questions. Not on each of the thousands of companies that the fund is invested in.

Re: Bogle Sounds a Warning on Index Funds

#43

Post by alehul » Fri, Nov 30, 2018, 3:59 PM UTC

koboll wrote: post #40

alehul wrote: post #9

Earlier quoted context omitted.

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.

That's why being a passive investor is often the best route for the average person, unless you have the opportunity to invest in a successful fund that takes an active role, or you put in the effort (and have the skill/luck/whatever) to invest yourself.

I'd point out, however, that your competition is usually not "HFT algos on servers located as physically close as possible," unless you are, yourself, a HFT trader. Even if you're buying a security for a few cents more because an HFT firm has corrected the price, if you're holding for weeks, months, or years... what's the difference? There's room for both of you to succeed, as long as your investment philosophies and holding periods differ that significantly.

Re: Bogle Sounds a Warning on Index Funds

#44

Post by timerol » Fri, Nov 30, 2018, 4:03 PM UTC

SilasX wrote: post #37

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 90% of shares are non-intervening that means hostile takeovers are now 10x cheaper to implement. It would be weird to be a company with market cap $100M, where $10M could buy a controlling interest in voting shares.

Re: Bogle Sounds a Warning on Index Funds

#45

Post by avisser » Fri, Nov 30, 2018, 4:05 PM UTC

SilasX wrote: post #37

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…

> 10% vs 90% of share votes being on auto-pilot shouldn't matter?

I'm not familiar with these non-intervention clauses, but in the 10/90 scenario haven't you made it much easier to seize control of the company? Now I only need 5%+1 of the shares to do as I wish?

Re: Bogle Sounds a Warning on Index Funds

#46

Post by SilasX » Fri, Nov 30, 2018, 4:06 PM UTC

timerol wrote: post #44

SilasX wrote: post #37

Earlier quoted context omitted.

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 90% of shares are non-intervening that means hostile takeovers are now 10x cheaper to implement. It would be weird to be a company with market cap $100M, where $10M could buy a controlling interest in voting shares.

It's not any easier (to a first approximation), because the share price will increase as you try to buy in, and the lower fraction of actively traded shares makes them that much more scarce and ramp up in value that much more quickly.

Re: Bogle Sounds a Warning on Index Funds

#47

Post by mcguire » Fri, Nov 30, 2018, 4:09 PM UTC

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.…

Tracking the index on your own would be more than a full time job. You could do it automatically, but that just reinvents the fund

The S&P500 had 500 stocks. Do you want to vote ~1.5 times a day?

Re: Bogle Sounds a Warning on Index Funds

#48

Post by Misdicorl » Fri, Nov 30, 2018, 4:12 PM UTC

SilasX wrote: post #37

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…

Much easier for other parties to get a controlling interest if you need 5.1% of the stock compared to 50.1%

Re: Bogle Sounds a Warning on Index Funds

#49

Post by nthot » Fri, Nov 30, 2018, 4:12 PM UTC

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.

Anecdotally, I have a few friends who work in the railroad industry and they are currently seeing something close to this. The company is almost entirely owned by large institutional funds.

Union Pacific has a huge drive for constantly increasing efficiency. Their profits are up significantly year over year, but this fall they cut about 500 jobs from their headquarters in Omaha, around 6% of their Nebraska employees, and this isn't even the first time they've done it. To keep the big investors happy they are constantly searching for ways to cut costs.

On the other hand, this might also be a product of the industry. The railroad is necessarily growth constrained. It's unlikely that significantly more products will move to being transported by rail and there is very little room for new lines to be constructed.

Re: Bogle Sounds a Warning on Index Funds

#50

Post by justin66 » Fri, Nov 30, 2018, 4:13 PM UTC

et2o wrote: post #15

decimalst-s wrote: post #10

Is there anything legally preventing these funds from having some kind of system where you have fractional voting rights proportional to your number of shares in the mutual fund vs. the weight of the company in the index it represent? e.g. You have 100 shares of a mutual fund that has 1% of its holdings in some company- thus you have 1 vote for that company's shareholder ballot, or whatever the fractional representat…

They could even just hold their own internal vote immediately before the actual vote and net out the results. Then vote this result in the actual vote. I don't think there is a rule that if you vote, you must vote with every share. Also gets rid of any issues of fractional voting; they can track fractional votes in the internal vote, and then just round the result in the actual vote. The biggest problem is that gener…

> If the index funds allow their investors to vote on everything, to some extent they stop being an index fund that passively tracks the market.

That doesn't really follow. Tracking the index and voting are two separate concerns.

That's part of the point of Bogle's objections (I think - I can't read the article, I can only read about it), that they're involved in management already, even though that's not part of their mission. Simply voting based on a proxy vote of the fund's shareholders is arguably more "passive" for the fund management than what they're doing now, if you're concerned about passiveness.