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Bogle Sounds a Warning on Index Funds

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Re: Bogle Sounds a Warning on Index Funds

#51

Post by walrus66 »

SilasX wrote: post #46
timerol wrote: post #44

Earlier quoted context omitted.

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.

To expound what you're suggesting, which is completely ridiculous, is that if someone buys 5.1% of actively traded float, the price will exponentially surge such that it would be equivalently priced to purchasing 51% of float in a market without a 90% passive stake.

Re: Bogle Sounds a Warning on Index Funds

#52

Post by everdev »

avisser wrote: post #45
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…

> 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?

Or, it's easier to pass things with a shareholder vote because the index funds won't vote.

Re: Bogle Sounds a Warning on Index Funds

#53

Post by refurb »

davio wrote: post #13
sseveran wrote: post #6

Earlier quoted context omitted.

I have a hard time seeing it as unintended. If you are not promising any differentiation between yourself and the index than the only thing to really compete on is cost. There are economies of scale in finance, specifically if you need to optimize solely for AUM.

There's definitely a race to the bottom going on with the free Fidelity funds and Vanguard reducing the dollar minimum by 70% for a lot of admiral shares.

Yet another great example of "race to the bottom" benefiting consumers. Not sure why it's used in a negative way all the time.

Re: Bogle Sounds a Warning on Index Funds

#54

Post by walrus66 »

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…

Ignoring the obvious controlling interest issues which others have mentioned, which is the largest issue...

That's a funny contradiction of a sort - then the index fund becomes the agent it's supposed to be observing.

For one, Blackrock is not Berkshire Hathaway - and in reality, obviously Blackrock can't wake up tomorrow and decide to be. They're not built for that.

Another scary thing is that the market is being increasingly turned into a derivative, and the underlying asset becomes more volatile (certainly for many different reasons) as it becomes proportionally smaller .

Re: Bogle Sounds a Warning on Index Funds

#55

Post by everdev »

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.

You also can't determine which 5% you're buying on the open market. You might just be buying shares sold by index funds.

Re: Bogle Sounds a Warning on Index Funds

#56

Post by zAy0LfpBZLC8mAC »

mcguire wrote: post #47
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?

> 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

That reinvents funds ... without the problem of accumulating all the power in a few hands, which was exactly my point?

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

No, and why would I have to? For one, many index funds don't vote on many stocks either. But more importantly, the point is to unbundle voting rights from the portfolio management aspect. Just as that doesn't mean that you have to manually track an index, it doesn't mean you have to manually vote either, does it? You can just delegate it to some group that you think represents your interests, and you could do so selectively. If some group wants to get some particular company to change something and you support that, you could just delegate the voting rights for that one company to that group.

Re: Bogle Sounds a Warning on Index Funds

#57

Post by zAy0LfpBZLC8mAC »

dumb_troll wrote: post #31
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?

Yeah, what about that? They get the same overall investment strategy as an index fund, just without the concentration of power?!

Re: Bogle Sounds a Warning on Index Funds

#58

Post by yourapostasy »

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.

Bogle has gone on record that he believes the market efficiency limits of passive indexing are somewhere in the 70-90% range of equities held inside such broad market indexes [1]. A more reasonable and less click-baity headline would have been "Bogle Sounds Governance Warning on Index Funds".

[1] https://www.ft.com/content/4594f554-ba1a-11e7-9bfb-4a9c83ffa...

Re: Bogle Sounds a Warning on Index Funds

#59

Post by nabla9 »

cs702 wrote: post #7

If the stock market becomes dominated by copycats copying each other , can it price equity risk accurately?

As long as there are at least some active investors left they can, because they follow price changes set by active investors passively.

If index funds start to create systematic valuation errors, active strategies start to perform better and they start to outperform index funds. This is not the case, because index funds beat active fund management constantly over longer periods. (The article raises concerns of corporate governance and accumulation of power that is different issue).

Matt Levine https://www.bloomberg.com/opinion/articles/2016-08-24/are-in...

>there is an alternative view that the rise of passive investing will improve capital allocation, because bad active investors will be driven out but good ones will remain. The passive investors can't influence relative prices, since they just buy the market portfolio, meaning that the fewer but better active investors will continue to make the capital allocation decisions. On this view, lower returns to active management are a sign that prices are more efficient and capital allocation is getting better

Re: Bogle Sounds a Warning on Index Funds

#60

Post by lifeformed »

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…

The article says that this solution has unintended consequences too, since you are now transferring voting rights from the share owner, who cares about the long term performance of the company, to share renters, who generally just care about the short term, which is counterproductive.

Although I'm not sure I get that - I don't quite see how the renter's would be especially more short sighted - it's not like the fund is obligated to hold the stocks any longer than anyone else.

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