From the Wall Street Journal, Nov. 29:
The father of the index fund
says it’s probably only a matter of time before they own half of all
U.S. stocks; ‘I do not believe that such concentration would serve the
national interest’
By John C. Bogle
There no longer can be any doubt that the creation of the first index
mutual fund was the most successful innovation—especially for
investors—in modern financial history. The question we need to ask
ourselves now is: What happens if it becomes too successful for its own
good?
The First Index Investment Trust, which tracks the returns of the
S&P 500 and is now known as the Vanguard 500 Index Fund, was founded
on December 31, 1975. It was the first “product,” as it were, of a new
mutual fund manager, The Vanguard Group, the company I had founded only
one year earlier.
The fund’s August 1976 initial public offering may have been the worst underwriting in Wall Street history.
Despite the leadership of the Street’s four largest retail brokers, the
IPO fell far short of its original $250 million target. The initial
assets of 500 Index Fund totaled but $11.3 million—falling a mere 95%
short of its goal.
The fund’s struggle for the attention (and dollars) of investors was epic. Known as “Bogle’s folly,”
the fund’s novel strategy of simply tracking a broad market index was
almost totally rejected by Wall Street. The head of Fidelity, then by
far the fund industry’s largest firm, put the kiss of death on his tiny
rival: “I can’t believe that the great mass of investors are [sic] going
to be satisfied with just receiving average returns. The name of the
game is to be the best.”
Almost a decade passed before a second S&P 500 index fund was formed, by Wells Fargo in 1984. During that period, Vanguard’s index fund attracted cash inflow averaging only $16 million per year.
Now let’s advance the clock to 2018. What a difference 42 years
makes! Equity index fund assets now total some $4.6 trillion, while
total index fund assets have surpassed $6 trillion. Of this total, about
70% is invested in broad market index funds modeled on the original
Vanguard fund.
Yes, U.S. index mutual funds have grown to huge size, with their
holdings doubling from 4.5% of total U.S. stock-market value in 2002 to
9% in 2009, and then almost doubling again to more than 17% in 2018.
Even that penetration understates the role of mutual fund managers, as
they also offer actively managed funds, and their combined assets amount
to more than 35% of the shares of U.S. corporations.
If historical trends continue, a handful of giant institutional
investors will one day hold voting control of virtually every large U.S.
corporation. Public policy cannot ignore this growing dominance, and
consider its impact on the financial markets, corporate governance, and
regulation. These will be major issues in the coming era.
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....
... 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....
...
MUCH MORE, including proposed solutions.
