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Bogle Sounds a Warning on Index Funds

wsj.com

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Re: Bogle Sounds a Warning on Index Funds

#61

Post by dragonwriter »

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.

> If 90% of shares are non-intervening that means hostile takeovers are now 10x cheaper to implement.

Naively (ignoring other dynamics of index funds), sure, compared to 100% investors actively engaged in governance. But I suspect investment in index funds replaces largely hands-off direct investment and so, market wide, has virtually no average effect on that (though it may shift the effect among firms compared to those investors doing so directly.)

Re: Bogle Sounds a Warning on Index Funds

#62

Post by swarnie_ »

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?

Most vote with the board on all matters.

The only large fund i know that regularly gets its hand dirty is the Norwegian sovereign wealth fund.

Re: Bogle Sounds a Warning on Index Funds

#63

Post by pmiller2 »

nthot wrote: post #49
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,…

You forgot: there's a hard ceiling to how high they can raise prices, because they have to compete with trucks. Together, that all implies that if they want higher earnings, cost cutting is the only way.

Re: Bogle Sounds a Warning on Index Funds

#64

Post by garmaine »

everdev wrote: post #55
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.

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

Only if you ranked the price by buying shares. But even if that’s as the case the. The threshold is 10% not 5%. Point still stands.

Re: Bogle Sounds a Warning on Index Funds

#65

Post by pmiller2 »

refurb wrote: post #53
davio wrote: post #13

Earlier quoted context omitted.

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.

It's used in a negative way all the time because the people using it are usually on the losing end of the deal.

Re: Bogle Sounds a Warning on Index Funds

#66

Post by wbl »

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?

They follow ISS or similar.

Re: Bogle Sounds a Warning on Index Funds

#67

Post by kjw »

Related to this, supervoting shares are popular with tech startups that are going public, but the street generally frowns upon these structures from a corporate governance perspective.

Founders pitch supervoting control as a way to make sure the company can realize its long term potential by protecting themselves from activist investors with a short term view.

So far, ownership of new IPOs hasn't been affected much due to their small market caps and subsequent miniscule weighting in indices. It will be interesting to see if increasing concentrated ownership by index funds may eventually play a factor and perhaps increase acceptance of supervoting.

Re: Bogle Sounds a Warning on Index Funds

#68

Post by hangonhn »

nthot wrote: post #49
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,…

I'm not entirely sure your conclusion is correct. Almost 40% of all US freight is moved via rail. The reason passenger trains suck in the US is because our railroads are built for and prioritized for freight. When Berkshire Hathaway purchased BNSF, they noted that trains connect companies between the two coasts of the US. It is often the case that a company that produces something is on one coast but the port where its products go out is literally a continent away. Even domestically bound products have to be shipped between coasts because of how population centers in the US are situated. So assuming the US population and industries continue to grow, I think freight rail will continue to be in demand.

Re: Bogle Sounds a Warning on Index Funds

#69

Post by bulletsvshumans »

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 don't want to vote for each of the thousands of stocks I own indirectly through my index fund. I want Vanguard to vote on my behalf such that it proportionately replicates the votes of the non-index shareholders. This strategy is just an extension of the idea behind index funds in the first place: mirror the existing market.

Re: Bogle Sounds a Warning on Index Funds

#70

Post by wbl »

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.

Not necessarily true. If you are an active investor that doesn't necessarily mean the activities that compete with the HFT guys.
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