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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

#81

Post by mruts »

gomox wrote: post #41
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?

The S&P 500, along with a lot of their other products are proprietary and not easily reproducible. S&P doesn’t publish how it generates its indices, so they can charge a lot of money.

Would it be that hard to generate an index that had similiar exposure as an S&P index? Maybe not, but S&P is good at what they do and they have a lot of brand recognition.

Re: Bogle Sounds a Warning on Index Funds

#82

Post by pdog »

Of the proposed solutions, some combination of the following three items would be a solid first step (incremental without being too drastic):

* Full public disclosure by index funds of their voting policies and public documentation of each engagement with corporate managers.

* Require index funds to retain an independent supervisory board with full responsibility for all decisions regarding corporate governance.

* Make it clear that directors of index funds and other large money managers have a fiduciary duty to vote solely in the interest of the funds’ shareholders.

Re: Bogle Sounds a Warning on Index Funds

#83

Post by mruts »

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.…

You would have to trade constantly. Moreover, most people probably don’t have the capital. You can’t buy a fraction of a stock, and since the S&P is market cap weighted you would need a lot of stock in order to do anything like the S&P 500

Re: Bogle Sounds a Warning on Index Funds

#84

Post by AnthonyMouse »

walrus66 wrote: post #51
SilasX wrote: post #46

Earlier quoted context omitted.

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.

Not only that, it doesn't account for short sellers. Index funds will happily lend their "passive" shares to anyone (i.e. short sellers) willing to pay interest. So if prices start to rise as someone tries to buy 5%+1 of the shares, others will rightly determine that the shares are now overvalued and start selling them short (especially if the buyer is expected to harm the company), allowing the buyer to keep buying at a minor premium over the original price. Or even at a discount, if the purchase is seen as inevitable and the damage they're expected to do gets priced in.

Re: Bogle Sounds a Warning on Index Funds

#85

Post by grogenaut »

pmiller2 wrote: post #79
ethbro wrote: post #76

Earlier quoted context omitted.

> Of course electric automated trucks could change all that. Unmanned trucks crossing long distances of rural America sounds like a recipe for hijacking loads.

Automated trucks don't necessarily have to be unmanned.

Just declare trucks corporations which makes them people and then they'll be able to carry guns in most rural areas.

Re: Bogle Sounds a Warning on Index Funds

#86

Post by dwighttk »

azinman2 wrote: post #80
hangonhn wrote: post #71

Earlier quoted context omitted.

Uh... not sure if that's actually the case. Trains are cheaper and actually faster over a long distance. The optimal way to ship is actually intermodal: ship for between countries/continents, trains for long trips over land, and then trucks for the last leg. They don't really compete with each other as much as they work together, especially since they have a standardized protocol for inter-process communication known…

But why? I would think that trains, which aren’t constrained to gasoline and have dedicated tracks, should be able to obtain higher efficiencies compared to trucks going the same long distances?

you are correct. That's why they don't really compete with each other. You put it on a train for a long distance and then trucks pick it up to spread it out from there.

Re: Bogle Sounds a Warning on Index Funds

#87

Post by elsonrodriguez »

ethbro wrote: post #76
hangonhn wrote: post #71

Earlier quoted context omitted.

Uh... not sure if that's actually the case. Trains are cheaper and actually faster over a long distance. The optimal way to ship is actually intermodal: ship for between countries/continents, trains for long trips over land, and then trucks for the last leg. They don't really compete with each other as much as they work together, especially since they have a standardized protocol for inter-process communication known…

> Of course electric automated trucks could change all that. Unmanned trucks crossing long distances of rural America sounds like a recipe for hijacking loads.

Hijacking trucks filled to the brim with sensors sounds like a recipe for jail time.

The logistics of stopping and looting a truck involves too many parties, and ensuring that each party is following enough security protocols to not be identified via face, vehicle, or gait will ensure that only a few small sophisticated heists will ever be successful.

Re: Bogle Sounds a Warning on Index Funds

#88

Post by et2o »

justin66 wrote: post #50
et2o wrote: post #15

Earlier quoted context omitted.

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 the…

I have to disagree.

> Tracking the index and voting are two separate concerns

I do not believe this is really true. The entire point of exercising shareholder rights by voting is to improve the performance of the company. A shareholder's decisions might be right (improved stock value) or wrong (reduced stock value), but you can't argue that it's passive involvement in the company. Changes in a company's stock price will necessarily cause changes in the index that the index fund tracks.

Now, let's consider the point of an index fund with a passive investment strategy: the goal is to remove the need to make decisions in how a company operates and leave that to the better-informed investors and marketplace as a whole. Index funds in the ideal world simply want to ride along with what decisions the marketplace is making in the companies that the index tracks.

This is an important tension that really cannot be resolved if index funds are to be considered passive and also vote.

In practice, the votes made my index funds tend to be (thus far) ones that are on less controversial issues like best practices for management, etc. You don't see Vanguard pushing for mergers or spinoffs like Carl Icahn would try to do. However, in principle all shareholder votes exist on some continuum of activist investing.

Re: Bogle Sounds a Warning on Index Funds

#89

Post by AnthonyMouse »

Hermel wrote: post #72
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.

Non-intervening usually means the vote according to the recommendations of the board, and not that they abstain from voting.

That seems like a different kind of problem though. If funds that vote according to the recommendations of the board own >50% of the company, the board becomes unaccountable. (Unless they apply different rules to board elections, but then we're back to the original problem because the minority activist can elect their own board.)

Re: Bogle Sounds a Warning on Index Funds

#90

Post by dj-wonk »

azinman2 wrote: post #80
hangonhn wrote: post #71

Earlier quoted context omitted.

Uh... not sure if that's actually the case. Trains are cheaper and actually faster over a long distance. The optimal way to ship is actually intermodal: ship for between countries/continents, trains for long trips over land, and then trucks for the last leg. They don't really compete with each other as much as they work together, especially since they have a standardized protocol for inter-process communication known…

But why? I would think that trains, which aren’t constrained to gasoline and have dedicated tracks, should be able to obtain higher efficiencies compared to trucks going the same long distances?

Think of shipping as an optimization problem where various modes are selected for different parts of the path. You have to run the optimization problem to see what mix makes the most sense -- and don't expect it to necessarily be simple or obvious.

Logistics is complex; you'll also need to factor many things into the optimization: * both fixed and marginal costs of each mode (e.g. maintaining track, monitoring safety, wear and tear on vehicles, varying fuel costs) * constraints (due to technology, personnel, regulations, etc) * fluctuations in demand and shipping objectives * lots more

If you want to focus on only one slice of the problem... Sure, for the exact same route (meaning that a particular track has already been built), one would expect that trains are more efficient. The data shows that; e.g. https://en.wikipedia.org/wiki/Energy_efficiency_in_transport...

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