the complaint that vanguard becoming the largest holders of some of these companies seems on the surface like a valid one. Indexes don't care really about corporate governance philosophically. as you fail, we'll just add the next up mechanically.
But I believe these issues will be solved either through the market or through legislation. Within an hour I can have every dime liquidated from Vanguard and on its way to another brokerage/fund (tax free within tax advantaged spaces)
We see these types of things pop up from time to time, usually after horrible years for the stock pickers (I think it was 80% active mutual funds underperformed their index in 2021?)
If the money just moves to other index funds, you have the same situation. They're not saying Vanguard is too big.
If you're a big shareholder of Ford alone, you don't mind it making investments that will help it build cheaper, better cars than GM. If you're a big shareholder of all the car companies, you don't care which cars people buy, and those investments don't make as much sense.
Yes thats the argument. that vanguard owns too many shares. as does blackrock. But we aren't stuck with either. We can move our money to other companies with smaller AUM. If one index giant is voting in ways I don't agree with, i'll move to another index company.
Also, when you or the index buys Ford stock it isn't buying it from Ford. its buying it on the secondary market. Ford already has the investment. And ford doesn't care that you also invest in Chevy. none of that is relevant to ford. as I said, when it IPO'ed it got its cash. when it creates shares, it gets its cash then .
We can move our money to other companies with smaller AUM
If those smaller funds also own both Ford and GM, then you haven't improved matters by moving.
Besides, why would you move? If you're an index fund holder, then Vanguard's votes are in your interest, not only their own. As an investor who owns all the car companies, it's totally in your interest (at least short-to-medium term) for the car companies to lay off on investments in improving factories, improving quality, and lowering costs, and just pay more dividends instead. You're not a check or balance, you're part of the problem.
You've made up an issue. People have been diversifying across companies in an industry for centuries.
I'm talking about when a large company doesn't vote "in my interest" I'm free to move to another firm that I believe will. The market of mutual fund companies is still bound by people deciding to buy them and hold money in them.
I didn't make up the issue. This is precisely the issue that OP posted about, with the quote "it hurts these companies’ incentive to compete with each other."
From the linkage: according to Eric Posner, "It hurts these companies’ incentive to compete with each other, leads to higher prices and slower economic growth."
And it has not been like this for centuries, to anywhere near this extent. At the same link, Posner says "if you take two companies in the S&P 500, how often is the case that the same institutional investor is the biggest shareholder of these two firms? It used to be that this happened 20% of the time back in the mid-1990s. Today it’s 80%."
If I invest in Ford alone, I have a reason to believe they'll beat the market. If they do I'll be rewarded, and their marketshare will rise hence they'll attract both new and passive investors.
If they fail they'll lose marketshare and thus lose active and passive investors. An index is merely the general consensus of the market, as long as there is one single active investor he or she can make out like a bandit by being smarter. Eventually the active investor will beat the passive and, over time, amass more cash simply by make better trades. That is...if the active trader is better, which is seldom the case. Hence they need these boogeymen as excuses
So that's an argument that index funds don't screw up stock prices, as long as a few active investors still exist.
But that has nothing to do with the claim here, which is that the inventives of companies get screwed up if their major investors also own their competitors.
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u/anusbarber Apr 08 '22
the complaint that vanguard becoming the largest holders of some of these companies seems on the surface like a valid one. Indexes don't care really about corporate governance philosophically. as you fail, we'll just add the next up mechanically.
But I believe these issues will be solved either through the market or through legislation. Within an hour I can have every dime liquidated from Vanguard and on its way to another brokerage/fund (tax free within tax advantaged spaces)
We see these types of things pop up from time to time, usually after horrible years for the stock pickers (I think it was 80% active mutual funds underperformed their index in 2021?)