Index Fund Article

[Jerry1]

I thought this article was interesting.

https://www.bloomberg.com/news/feat...reat-index-fund-takeover?srnd=businessweek-v2

One statistic was particularly interesting:

In August 2019 the industry reached a milestone when the $4.27 trillion in passively managed U.S. stock funds outflanked the $4.25 trillion run by stockpickers.

The article is mostly about the control that the three largest index companies have, given that they hold roughly 20% of the market. I know it makes sense, but I didn’t realize that since they hold the stocks, they also do the voting and therefore influence the companies. I guess I’d say there is certainly potential for abuse, but mostly my take away is concern about how concentrated our world is becoming. The article also mentioned how this is similar to big tech.

Also, I think I saw an article posted here that relates to the milestone quoted above. If an efficient market has buyers and sellers trading stock and that is how price is determined, what happens as the pool of entities actually engaged in that level of buying and selling gets diluted? Who or how is the price actually being set? Personally, I’m concerned that index investing may be the cause of a bubble in the future or that it will be responsible for significant volatility as we go forward with fewer and fewer “first level” buyers and sellers to set the prices.

 

[bingybear]

IIRC Bogle noted within the last few years that too much indexing might not be good. I expect that price discovery may be difficult to do if everything is traded in big indexes.

 

[Montecfo]

IIRC Bogle noted within the last few years that too much indexing might not be good. I expect that price discovery may be difficult to do if everything is traded in big indexes.

I agree with that but I believe it will never reach that point, since there is so much hedge fund, private equity and other money waiting to capitalize on such imbalances.

Having said that I do believe cash flows into indexes have driven the stocks in the index higher. At some point this will reach an equilibrium and funds will begin to flow back into individual stocks, due to value considerations. Not sure when that will occur but I expect it will.

 

[pb4uski]

On the other side, index funds are only about 5% of daily trading, so there seems to be a large number of players assessing value and stock picking.... or momentum trading.... so I'm not particularly concerned.

 

[UnrealizedPotential]

I couldn't read the article because I had reached my free limit. In the past I had thought that indexing was bad because in a bear market the index fund can't sell particular stocks , but a stock fund manager that isn't tied to the index can. So I thought indexing was bad for this reason as one is locked into losses.

I have since come to believe this doesn't really matter. In a bear market, a nasty downturn, everything is going down anyways and going down a lot, so it probably doesn't matter too much what one buys or sells in the index or even outside of it as far as stocks are concerned. It's going down.

I have part of my portfolio in the SP500 index, but only 12%.

 

[donheff]

Although I can't think of what they may be, when I see articles like this, I worry about whether they may disclose structural factors that somehow make indexing negatively affect market value. What am I gonna do if passive investing no longer works? But there is nothing along those lines here, just concerns that the big guys at Black Rock, Vanguard, and State Street have huge voting influence -- and they do. Activists want them to influence corporate governance issues, others want them to stay out. Some folks think they need to be broken up or regulated to limit their influence.

Finding ways for fund investors to meaningfully effect managers' votes or ways to reasonably restrict those managers' participation will be difficult.

 

[OldShooter]

I have never really understood this issue about index funds voting their shares. Individual investors don't vote their shares in any meaningful aggregate way. Stock picker funds don't vote their shares in any meaningful aggregate way. So if index funds don't, it is a continuation of tradition. And, BTW, only insiders and a tiny number of outsiders with huge % positions ever influence a company anyway.

So I guess the idea is that index funds hold big enough positions that they could influence a company, essentially aggregating the little shareholders. But what influence do the little shareholders want? Example: Pro-BDS or against BDS. For a strong military or against? Pro immigration or against? Some we could probably agree on, like overpaid CEOs. I dunno; the idea has potential but the devil is in the details.

Re the death of price discovery, that is the foremost and longest-lasting of the stock-pickers' attacks on passive investing. The idea that passive will take over the market is a complete straw man. As soon as there are inefficiently priced stocks there will be traders to remedy that. It is a self-limiting process. So, not to worry.

 

[Time2]

How many stock picking experts have grown their portfolio at 14.5% over the last 10 years?
That what VTSAX did.
I'll stick with my Index fund.

 

[AnonEMouse]

Price discovery doesn't matter much when the vast majority of funds is pushing everything up and making them all overvalued.

This article touches on the voting issue but also covers the bubbliness of everything now:

https://www.npr.org/sections/money/2019/10/08/767884839/is-your-retirement-fund-ruining-our-economy

"We now look back at the housing bubble with an astonishment at the mass delusion behind the idea that home prices could always go up and that more people like Michael Burry didn't see it coming. It's possible that someday, we'll look at the promise that everyone can just buy and hold pieces of an entire market and nothing will go wrong the same way."

 

[OldShooter]

Price discovery doesn't matter much when the vast majority of funds is pushing everything up and making them all overvalued. ...

Viewed as simple deductive logic, the statement is probably true. However, everything after "when the ..." is conjecture.

The NPR article is kind of amusing. On one hand the guy is saying that price discovery is a problem but on the other he is talking about his strategies to identify and exploit price inefficiencies. His firm, Scion Asset Managment (https://whalewisdom.com/filer/scion-asset-management-llc), is listed as having an annual turnover well over 100%, so apparently he is finding plenty of trading opportunities despite those pesky indexers. He really can't have it both ways.

Really no news here. A guy who guessed right one other time is being encouraged to pontificate and he provides nothing more than a ghost story that has been extant for maybe a decade. Is there a monster hiding under the bed? Maybe. Maybe not. Only time will tell.