
The rise of passive investors - jboynyc
https://theconversation.com/these-three-firms-own-corporate-america-77072
======
mattmanser
A friend told me on Monday about an idea he'd just read that in fact
shareholders should be the least important of all in a company's consideration
and the US/UK maximize share-holder value laws/attitude is actually damaging.

The gist of the argument was:

\- Shareholders have no long-term investment in a company, they can easily
move their money if they feel a company is performing badly. They can have
little interest in long-term survival.

\- Employees and suppliers do have long-term investment, have barriers to
moving their commitment

Therefore you should discard the concept that a companies should maximize
share-holder value and should instead incentivize companies to focus on long-
term survival.

The example cited was GM, which did share buybacks instead of saving cash in
boom times and then went bust because it ran out of cash in a recession.

I'm yet to read the book (which I can't remember the title now), but it sounds
interesting and would be an effective counter to this concentration.

~~~
johanvts
Who are "you" in this case? If "you" are the employees "you" might naturally
have an entirely different view of what to optimize for than if "you" are the
shareholder. The promise of capitalism is that if we all optimize for our own
benefit, the invisible hand will make everyone better off.

~~~
pc86
First of all, capitalism does not "promise" anything. Secondly, it says that
_in aggregate_ , society will be better off in everyone focuses more or less
on their individual interests. It does not suggest that everyone in that
society will be better off.

In some hypothetical world, if you raise the median income 50% and increase
the quality of life for 95% of the population, while causing the other 5% to
end up in crippling poverty for the rest of their life, you've made that
society better in aggregate but certainly not for that 5%.

------
surrealize
I'm generally against concentrated market power, so I'm definitely sympathetic
to the point and I think it's good to be aware of this concentration of
ownership.

I'm not sure this is totally fair, though:

> We found that the Big Three, taken together, have become the largest
> shareholder in 40% of all publicly listed firms in the United States.

> Together, the Big Three are the largest single shareholder in almost 90% of
> S&P 500 firms

> The Big Three – seen together – are virtually always the largest shareholder
> in the few competitors that remain in these sectors.

They're aggregating these owners together, then saying that the aggregation is
larger than the non-aggregated other owners.

That's not too surprising, right? Taken together, the vowels cover more of the
alphabet than any other single letter. Undoubtedly true, but what does that
really tell us?

If the big three tend to vote with management, that sounds potentially
concerning. But are they just not voting for wacky shareholder proposals? What
proportion of those votes actually tip the outcome?

The section on the potential impact of this ownership concentration has a lot
of "could have" and "may be" in it. We should definitely be doing that
research, but at this stage the story isn't super compelling.

~~~
empath75
I feel like they should delegate their votes somehow to the people they are
actually buying shares for. I don't know what the right mechanism is, but it
seems wrong that by investing in a passive fund, I've also given up the right
to vote with my shares.

~~~
kasey_junk
You are _specifically_ doing that by investing in a fund.

You can build the underlying basket yourself if you want the voting rights.

------
shalmanese
Matt Levine over at Bloomberg [1] has over time written a lot of intelligent
stuff about the issues posed by the increasing dominance of index funds. I
find him to be one of the best finance writers around for being able to
incisively cut through a lot of the blather and obfuscation and get to the
heart of the issue.

[https://www.bloomberg.com/view/topics/money-
stuff](https://www.bloomberg.com/view/topics/money-stuff)

~~~
simonsarris
Levine really is an excellent writer, a joy to read almost irrespective of
subject.

------
jboynyc
The paper this is based on is open access:
[https://doi.org/10.1017/bap.2017.6](https://doi.org/10.1017/bap.2017.6)

------
saimiam
This book I'm reading discusses the ill-effects of stock ownership by huge
hedge funds. The authors call it grey capitalism where nameless, faceless
money managers deploy huge swaths of capital to own companies but don't
actually participate in their running.

It's hurting innovation because now the company is beholden to these owners
who never show up or look at the big picture. Their window of caring about the
company is a quarter to a year at best which is reset after every earnings
call.

~~~
grogenaut
Link?

~~~
saimiam
[https://www.amazon.com/Innovation-Illusion-Little-Created-
Wo...](https://www.amazon.com/Innovation-Illusion-Little-Created-
Working/dp/0300217404/ref=sr_1_1)

------
twoquestions
This is the kind of thing I fear. While most of us are rightly afraid of a
Soviet-style central planning, we were blind to _private_ central planners
like this controlling our economy.

We're nowhere near the level of dystopian control that Soviet central planners
had, but the trend is leaning closer to that than farther away, what with
companies listening to their investors before their customers.

~~~
ihsw2
Did you read the article? The article mentions that control may be more
centralized than before but its impact is limited to simply favoring stocks
that are perceived to exist for an extended period of time and consistently
tick upward in price.

Furthermore the article _specifically_ mentions that its impact is limited
because index funds are more "hands-off" than anything else. This implies
there is not more central planning, and (more to the point) there is _no_
planning -- just a reflexive response to stock price movement.

This is the purest expression of the "invisible hand of the market."

~~~
dang
_Please don 't insinuate that someone hasn't read an article. "Did you even
read the article? It mentions that" can be shortened to "The article mentions
that."_

[https://news.ycombinator.com/newsguidelines.html](https://news.ycombinator.com/newsguidelines.html)

------
castratikron
That you essentially waive your voting rights by investing in mutual funds is
a downside that usually isn't brought up in investing guides. The usual advise
is that, for most people, mutual funds are "better" than owning individual
stocks, and that index funds are "better" than actively managed funds because
most managers can't beat the market and can't justify the higher fees. But
each level of indirection dilutes your individual power to vote.

Shareholder voting really does make a difference. Here's one case where the
big three voted against management (for what I think were the right reasons):

[https://www.washingtonpost.com/news/energy-
environment/wp/20...](https://www.washingtonpost.com/news/energy-
environment/wp/2017/05/31/exxonmobil-is-trying-to-fend-off-a-shareholder-
rebellion-over-climate-change/)

------
jtcond13
The 'rise of passive investors' creates more opportunities for activist
investors to discover overvalued/undervalued stocks. Index funds aren't
affecting the prices of individual stocks. So long as the opportunity exists
to make money buy buying/shorting stocks, someone will be buying/shorting
stocks.

Moreover, executive compensation is still overwhelmingly set via earnings-per-
share targets in a fairly transparent manner. If there's a conspiracy afoot to
miss targets to benefit an industry sector, the authors haven't identified it.

I like the Matt Levine treatment of this question ('Are Index Funds
Communist?'):

[https://www.bloomberg.com/view/articles/2016-08-24/are-
index...](https://www.bloomberg.com/view/articles/2016-08-24/are-index-funds-
communist)

------
majewsky
Why is the index-fund market is so concentrated? Shouldn't it be incredibly
easy to break into this market?

~~~
w23j
But how would you compete against the established companies? It cannot be
higher returns, because all index-funds are supposed to have roughly the same
returns (if they mirror the same index).

So it must be lower fees. And you are able to charge lower fees if the total
amount of money you manage is big. (Because a tiny percentage of a huge sum
will still cover your costs.) The established players already manage a few
trillion dollars, so it is hard to compete against them in this area.

~~~
Vinalin
Absolutely correct. Also, in the case of Vanguard, they're known as an "At-
Cost" company. This means that they take no profit from the investors, and
instead will return any excess money in the form of higher returns. This makes
it very difficult to operate a profitable business in this space.

~~~
Jonnax
How does their business model work then? Subscription fees?

~~~
Mindless2112
Vanguard is structured as a mutual company; it is owned by funds managed by
the company, and is therefore owned by its customers. [1] So its owners have
no incentive to increase fees in order to increase profits.

Actually, Vanguard has been sued over this [2][3] -- the claim essentially
being that Vanguard ought to owe taxes on those profits that it didn't earn
from fees that it didn't charge.

[1]
[https://en.wikipedia.org/wiki/The_Vanguard_Group](https://en.wikipedia.org/wiki/The_Vanguard_Group)
[2] [https://www.nytimes.com/2016/02/07/your-money/vanguard-a-
cha...](https://www.nytimes.com/2016/02/07/your-money/vanguard-a-champion-of-
low-fees-faces-a-peculiar-tax-challenge.html?mcubz=0) [3]
[https://news.ycombinator.com/item?id=11081550](https://news.ycombinator.com/item?id=11081550)

