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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

#91

Post by zAy0LfpBZLC8mAC »

bulletsvshumans wrote: post #69
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.

In other words: You want them to not vote at all.

Which is a dumb idea, of course, as that just leaves the control over your capital to your adversaries. Passive investing works because goals are aligned: The only way to influence an index fund on the investing side of things into doing something stupid is by doing something stupid yourself. If you want to make an S&P500 index fund buy some penny stock, you have to buy it yourself first in massive quantities paying massive prices for it to drive up the market cap. Voting does not work that way.

Re: Bogle Sounds a Warning on Index Funds

#92

Post by cimmanom »

lifeformed wrote: post #60
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…

Also, what percentage of index fund investors hold those shares only in the short term? I thought much of the point of index fund investing is that it's great for a relatively low-effort, reasonably-diversified buy-and-hold strategy on the part of anyone from individual investors planning for retirement to institutional investors managing pensions?

Re: Bogle Sounds a Warning on Index Funds

#93

Post by kolbe »

nabla9 wrote: post #59
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 corpor…

>index funds beat active fund management constantly over longer periods

This was only the case because 'long periods' include the periods in which free riders (indexes) were small relative to the active and activist shareholders.

Re: Bogle Sounds a Warning on Index Funds

#94

Post by lancekey »

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…

Actually, I interviewed with these guys[0] trying to accomplish exactly what you suggest.

Apparently still in beta, so the site doesn't tell you much, but worth keeping an eye on.

[0] https://say.com/

Re: Bogle Sounds a Warning on Index Funds

#95

Post by dj-wonk »

dwighttk wrote: post #86
azinman2 wrote: post #80

Earlier quoted context omitted.

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.

Sometimes people use "compete" in a casual way that overlooks key economic connections. Competition is a force that is always present, even if it is not currently the "most obvious" factor in play at a given time.

I think any definition of competition must be relative to the sphere of economic activity. So, when it comes to transportation in general, rail and trucks do compete -- by this I mean they offer services with varying prices and characteristics.

Just because rail and trucking have different sweet spots at a particular point in time does not mean that they don't compete. Both (a) think about how and why customers choose them over the other, (b) seek opportunities (for investment or growth) that lead to a competitive edge, and (c) therefore, influence each other.

Re: Bogle Sounds a Warning on Index Funds

#96

Post by [deleted] »

bulletsvshumans wrote: post #69
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.

[deleted]

Re: Bogle Sounds a Warning on Index Funds

#97

Post by dmurray »

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,…

The big index funds aren't exactly known as activist investors. Even if it's "Wall Street" collectively, it's not Vanguard or State Street that is pushing Union Pacific to cut costs.

Re: Bogle Sounds a Warning on Index Funds

#98

Post by kolbe »

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…

How would you handle the fractional share ownership concept? A person with $10,000 of SPY shares probably doesn't even own a full share of most components[1]. And even ones that she does own more than a share of like AAPL, it won't be an integer.

[1] for example, you would need a $270,000 investment before you own a full share of SRCL.

Re: Bogle Sounds a Warning on Index Funds

#99

Post by jonknee »

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,…

The pressure to increase profits exists regardless of ownership, if anything having large institutional funds own the majority lessens the pressure (vs an activist fund or something similar). If they're leaving money on the table someone is going to take it.

Re: Bogle Sounds a Warning on Index Funds

#100

Post by jonknee »

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.

You do not get 3,641 letters asking you to vote in each of the companies that make up VTI. If you own shares of a company directly you will get a letter and you may get a letter about governance of the fund you own, but not for the individual names in it (you own a piece of something that owns the actual shares).
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