Look, I want you to be a happy, long-term investor. It would be easy for both of us if I told you to just buy an index fund, set it, and forget it. That approach may have worked well in the past, but I have concerns moving forward. When the late, great, founding-father of indexing Jack Bogle expressed dismay for his creation on his deathbed, I paid attention.
Only a few months before he died, Bogle wrote, “Three index fund managers dominate the field with a collective 81% share of index fund assets: Vanguard has a 51% share; BlackRock, 21%; and State Street Global, 9%. Such domination exists primarily because the indexing field attracts few new major entrants.”
Most observers expect that the share of corporate ownership by index funds will continue to grow over the next decade. It seems only a matter of time until index mutual funds cross the 50% mark. If that were to happen, the “Big Three” might own 30% or more of the U.S. stock market—effective control. I do not believe that such concentration would serve the national interest.
My concerns are shared by many academic observers. In a draft paper released in September, Prof. John C. Coates of Harvard Law School wrote that indexing is reshaping corporate governance, and warned that we are tipping toward a point where the voting power will be “controlled by a small number of individuals” who can exercise “practical power over the majority of U.S. public companies.” Professor Coates does not like what he sees, and offers tentative policy options—some necessary, often painful to contemplate. His conclusion—“The issue is not likely to go away”—is unarguable.
What concerns me, and concerned Bogle, is the power big fund companies like Vanguard, and BlackRock (the 800 lb. gorillas in the indexing room), hold over the companies whose shares are held in their mutual funds and ETFs. A simple directive by an environmentally motivated mutual fund CEO carries a lot of weight. He can dictate to his team to tell fund-held companies that the future is ESG, or that his green initiative, for example, is here to stay—or else. This may not be what the average investor on Main Street signed up for.
Under the heading that bigger is not better, how do you think these big fund firms will survive in a zero-cost game? They’re commodities after all. They need to have big ideas, like ESG, to vacuum up more money from you and me and all the other investors out there. In other words, they need novelty funds that charge high fees.
Believe me, they’re emailing me ESG crap all day long. This is the only way forward for them. They need to keep pounding the pavement to suck in new money and charge higher fees. “Hey, let’s talk about saving the environment and making everyone feel good about throwing money at this idea and hit ‘em where it hurts,” is the pitch.
Action Line: One reason I want you to own a diversified mix of individual stocks is so you can vote with your feet when the big dogs push initiatives for their greener pastures—ones that don’t necessarily look too good to you.
Originally posted on Your Survival Guy.