FT article: "Pension funds raise concern over index manager stewardship"

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tristessa79
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FT article: "Pension funds raise concern over index manager stewardship"

Post by tristessa79 » Mon Jun 24, 2019 2:28 pm

Interesting piece in the Financial Times today (linking to Google search results so non-subscribers can access).

This bit particularly caught my eye: "The Big Three in passive investment — BlackRock, Vanguard and State Street, which collectively oversee more than $14tn — have grown their stewardship teams, which oversee their voting and engagement, in recent years. But they remain relatively small. BlackRock has 43 people working in stewardship, Vanguard has 35 and SSGA has a dozen. [...] At a time of fierce competition between passive managers, [a report's author] predicts the quality of stewardship will become a way for them to stand out."

What are everyone's thoughts on Vanguard's stewardship right now?

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Vulcan
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Re: FT article: "Pension funds raise concern over index manager stewardship"

Post by Vulcan » Mon Jun 24, 2019 2:35 pm

tristessa79 wrote:
Mon Jun 24, 2019 2:28 pm
Interesting piece in the Financial Times today (linking to Google search results so non-subscribers can access).

This bit particularly caught my eye: "The Big Three in passive investment — BlackRock, Vanguard and State Street, which collectively oversee more than $14tn — have grown their stewardship teams, which oversee their voting and engagement, in recent years. But they remain relatively small. BlackRock has 43 people working in stewardship, Vanguard has 35 and SSGA has a dozen. [...] At a time of fierce competition between passive managers, [a report's author] predicts the quality of stewardship will become a way for them to stand out."

What are everyone's thoughts on Vanguard's stewardship right now?
What competitive advantage the index manager with "better atewardship" would have?
As an individual investor, I get combined result of everyone's stewardship (similar to market price. "market stewardship"?), but I go get to choose whose fees to pay.
If you torture the data long enough, it will confess to anything. ~Ronald Coase

afan
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Re: FT article: "Pension funds raise concern over index manager stewardship"

Post by afan » Mon Jun 24, 2019 2:53 pm

I cannot imagine choosing among index fund providers based on their stewardship. What basis would I have? "The more people in the Stewardship Department the better?" How about "the less money spent on stewardship the better?"
Save that cost and guve it to investors in higjer returns.

I have no idea how these companies vote their proxies. I don't care. I don't want to pay one cent to have them devote more time and attention to it.
An index fund should try to ensure companies are being managed in the interests of sharholders. Unfortunately, many proxy questions have nothing to do with that.
We don't know how to beat the market on a risk-adjusted basis, and we don't know anyone that does know either | --Swedroe | We assume that markets are efficient, that prices are right | --Fama

Coltrane75
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Re: FT article: "Pension funds raise concern over index manager stewardship"

Post by Coltrane75 » Mon Jun 24, 2019 3:03 pm

I'm not aware of any issues with Vanguard's stewardship.

There seems to be a steady drum of what IMO is passive index concern trolling over the past year.

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Re: FT article: "Pension funds raise concern over index manager stewardship"

Post by alex_686 » Mon Jun 24, 2019 3:32 pm

Vulcan wrote:
Mon Jun 24, 2019 2:35 pm
What competitive advantage the index manager with "better atewardship" would have?
As an individual investor, I get combined result of everyone's stewardship (similar to market price. "market stewardship"?), but I go get to choose whose fees to pay.
Tradagies of the Commons. Rational actions of the individuals dors nit always lead to tge optimization of society. A valis criticismof Vanguard, but I wish authors would also include solutions.

TXGator
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Re: FT article: "Pension funds raise concern over index manager stewardship"

Post by TXGator » Mon Jun 24, 2019 3:32 pm

Having been on the ESG side of a MegaCorp with significant ESG pressure; the pension funds are frustrated that they vote with management as long as there are no major corporate governance issues. These are the activist pension funds like CalPERS and NY State that are pressuring firms on issues like climate.

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Re: FT article: "Pension funds raise concern over index manager stewardship"

Post by GrowthSeeker » Mon Jun 24, 2019 3:51 pm

Perhaps the title should read:
"Money managers raise concern over loss of commissions due to greater use of index funds and decreased need for money managers."

or

"Money managers raise concern because their livelihood depends on the notion that active management beats passive management, and the increased use of index funds means that a greater percentage of people will realize that this notion is untrue."
Just because you're paranoid doesn't mean they're NOT out to get you.

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Re: FT article: "Pension funds raise concern over index manager stewardship"

Post by retiringwhen » Mon Jun 24, 2019 4:12 pm

I have been thinking about the stewardship issue since Jack Bogle started raising issues related this a year ago or so.

I think there is both a major challenge and opportunity for differentiation by the big index houses. The challenge can be stated as thus:

I am 100% sure I have very different stewardship priorities than the majority of the investors who make noise in the area. My priorities may overlap with some portion of the investors.

If, Vanguard or Blackrock starts voting on issues that do not align with my priorities (read that as my values and morals), I may be forced to consider different investment approaches.

The challenge for Vanguard (or whomever) is how to not alienate some significant portion of their investors while meeting their stewardship responsibilities?

The company that comes up with an answer to that problem will have a real differentiation to sell.

Truly, this is the long-term issue related to indexing that I think is the entire industry's achilles's heel that can potentially bring success of harnessed properly.

I have ideas to address this problem, but they are not well enough formed to put out as a true proposal yet. Something I need to work on....

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Re: FT article: "Pension funds raise concern over index manager stewardship"

Post by Svensk Anga » Mon Jun 24, 2019 4:34 pm

I fail to see why this issue is tied to index funds. Are we supposed to believe that an active fund manager with 100%/annum portfolio turnover is concerned with stewardship issues? I would bet that the active manager is pressured by his board to devote minimal resources to stewardship. If anything, the index funds as very long term holders should be more involved than active funds.

And what about the good ole days, before mutual fund assets were significant? Decades ago most stock was held by individuals. How many bothered to research and vote contrary to the boards’ recommendations?

This is just more propaganda from folks whose gravy train is being derailed.

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Re: FT article: "Pension funds raise concern over index manager stewardship"

Post by Seasonal » Mon Jun 24, 2019 4:46 pm

alex_686 wrote:
Mon Jun 24, 2019 3:32 pm
Vulcan wrote:
Mon Jun 24, 2019 2:35 pm
What competitive advantage the index manager with "better atewardship" would have?
As an individual investor, I get combined result of everyone's stewardship (similar to market price. "market stewardship"?), but I go get to choose whose fees to pay.
Tradagies of the Commons. Rational actions of the individuals dors nit always lead to tge optimization of society. A valis criticismof Vanguard, but I wish authors would also include solutions.
The big funds may own enough stock to overcome the tragedy of the commons problem.

Interesting analysis of stewardship by funds, including the problem that they pay the full price for their stewardship activities, but only reap a fraction of the total benefit: https://corpgov.law.harvard.edu/2018/06 ... ewardship/

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SlowMovingInvestor
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Re: FT article: "Pension funds raise concern over index manager stewardship"

Post by SlowMovingInvestor » Mon Jun 24, 2019 5:06 pm

I think the issue with index funds is that they can't just leave if they're unhappy with management. Active funds can, and sometimes do.

Does this make any real difference to corporate governance ? I am not sure. But it may mean that index funds should pay attention to how they vote proxies.

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Re: FT article: "Pension funds raise concern over index manager stewardship"

Post by Vulcan » Mon Jun 24, 2019 5:42 pm

Seasonal wrote:
Mon Jun 24, 2019 4:46 pm
alex_686 wrote:
Mon Jun 24, 2019 3:32 pm
Vulcan wrote:
Mon Jun 24, 2019 2:35 pm
What competitive advantage the index manager with "better atewardship" would have?
As an individual investor, I get combined result of everyone's stewardship (similar to market price. "market stewardship"?), but I go get to choose whose fees to pay.
Tradagies of the Commons. Rational actions of the individuals dors nit always lead to tge optimization of society. A valis criticismof Vanguard, but I wish authors would also include solutions.
The big funds may own enough stock to overcome the tragedy of the commons problem.

Interesting analysis of stewardship by funds, including the problem that they pay the full price for their stewardship activities, but only reap a fraction of the total benefit: https://corpgov.law.harvard.edu/2018/06 ... ewardship/
Doesn't look like they are offering any solutions there.

Perhaps if at some point the stewardship of the publicly held companies becomes less efficient as a result of growing index holdings, private companies will have a competitive advantage.

Good thing Vanguard is already considering expanding in towards private equity. Then we can index it, too, and eat the competition away from the inside :twisted:
If you torture the data long enough, it will confess to anything. ~Ronald Coase

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Re: FT article: "Pension funds raise concern over index manager stewardship"

Post by afan » Mon Jun 24, 2019 7:47 pm

Seasonal wrote:
Mon Jun 24, 2019 4:46 pm
alex_686 wrote:
Mon Jun 24, 2019 3:32 pm
Vulcan wrote:
Mon Jun 24, 2019 2:35 pm
What competitive advantage the index manager with "better atewardship" would have?
As an individual investor, I get combined result of everyone's stewardship (similar to market price. "market stewardship"?), but I go get to choose whose fees to pay.
Tradagies of the Commons. Rational actions of the individuals dors nit always lead to tge optimization of society. A valis criticismof Vanguard, but I wish authors would also include solutions.
The big funds may own enough stock to overcome the tragedy of the commons problem.

Interesting analysis of stewardship by funds, including the problem that they pay the full price for their stewardship activities, but only reap a fraction of the total benefit: https://corpgov.law.harvard.edu/2018/06 ... ewardship/
Interesting article. Although they argue that the incentives may lead index fund managers to do little in the way of stewardship, they rest part of their analysis on an assumption that is increasingly unture.

The authors state that index fund managers should compare the cost of increased stewardship to the increased value of the companies. They say that the increase in corporate value would apply to all shares of the companies, not just those held by the fund. Since it is an index fund, the index is also the benchmark. So increasing the value of the index causes a proportional increase in the benchmark. Assuming the index fund holds a relatively small share of the total market value of a company, the fund would spend its own money to make everyone better off. This would not improve its competitive position.

But what if a small number of index funds held a large share of the market? That is the situation now and the continued growth of the big three will make this even more in the future. So now one of the big index funds can spend money on better stewardship and capture a large share of the gains. If the big three index fund operators were to agree on a vote for a particular company, they could pretty much force whatever solution they chose.

Thus, they could be rewarded for their stewardship activities.

Of course, this assumes that there are many questions for which an engaged index fund manager would uncrease corporate value.

Many proxy votes are about making the company adopt the political values of the proponents. It is not at all clear that supporting these, or even engaging in the debate, would make the companies more profitable.
We don't know how to beat the market on a risk-adjusted basis, and we don't know anyone that does know either | --Swedroe | We assume that markets are efficient, that prices are right | --Fama

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Re: FT article: "Pension funds raise concern over index manager stewardship"

Post by asset_chaos » Mon Jun 24, 2019 8:40 pm

I dare say that Vanguard has enough clients that for any question on the ESG spectrum, especially on the E and S, Vanguard clients will have opinions that span all possible opinions. Best for Vanguard to not even try to become activist on these questions. On the other hand, for governance there are known best practices, like not having the ceo and board chair be the same person, and Vanguard could push for adoption of those practices because most clients would agree with that. I speculate.

If pension funds are pushing index managers to be more activist, it sounds like pension funds are trying to pass the buck on complaints from their own constituents. The index managers should resist because it impacts their other clients.
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Re: FT article: "Pension funds raise concern over index manager stewardship"

Post by Jeff Albertson » Mon Jun 24, 2019 8:53 pm

This question is probably above the pay grade of 100% of the people on this board, but in my lowly opinion should set alarms among regulators. See "The Specter of the Giant Three", by Lucian Bebchuk (Harvard Law School) and Scott Hirst (Boston University) https://corpgov.law.harvard.edu/2019/05 ... ant-three/
or
https://papers.ssrn.com/sol3/papers.cfm ... id=3385501
Finally, our view on the problems with the growing concentration of ownership substantially differs from that of Coates. Whereas Coates seems to be concerned that investment managers will excessively use the power that comes from their large ownership stakes, we have a very different concern—that the Giant Three will have incentives to be excessively deferential to corporate managers. Our concern is therefore that the substantial proportion of equity ownership with incentives towards deference will depress shareholder intervention overall, and will result in insufficient checks on corporate managers.

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Re: FT article: "Pension funds raise concern over index manager stewardship"

Post by Vulcan » Tue Jun 25, 2019 10:36 am

afan wrote:
Mon Jun 24, 2019 7:47 pm
But what if a small number of index funds held a large share of the market? That is the situation now and the continued growth of the big three will make this even more in the future. So now one of the big index funds can spend money on better stewardship and capture a large share of the gains. If the big three index fund operators were to agree on a vote for a particular company, they could pretty much force whatever solution they chose.
It seems to me that the problem of corporate stewardship by mutual funds (index or otherwise) is not dissimilar to the problem of price discovery in a market where a large share of assets is held by buy-and-hold investors who rarely trade (it doesn't matter if they are total index holders, slide-and-dicers, or even individual stock holders, so long as they do not trade much).

I believe it has been shown that the market can set prices efficiently even when only a small fraction of shareholders are "active investors" (who make relatively frequent trades based on "fundamentals").

If so, could the same be true for corporate stewardship?

How large a share of all shareholders needs to be actively involved in corporate stewardship for corporate governance to remain effective?

In fact, might it be better if the passive total market cap investors stayed out of governance? After all, their interests are not the same that the interests of investors in individual companies are. If I own both Ford and GM, I may not be that invested in one of them outcompeting another.
If you torture the data long enough, it will confess to anything. ~Ronald Coase

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Re: FT article: "Pension funds raise concern over index manager stewardship"

Post by retiringwhen » Tue Jun 25, 2019 11:25 am

Vulcan wrote:
Tue Jun 25, 2019 10:36 am
afan wrote:
Mon Jun 24, 2019 7:47 pm
But what if a small number of index funds held a large share of the market? That is the situation now and the continued growth of the big three will make this even more in the future. So now one of the big index funds can spend money on better stewardship and capture a large share of the gains. If the big three index fund operators were to agree on a vote for a particular company, they could pretty much force whatever solution they chose.
It seems to me that the problem of corporate stewardship by mutual funds (index or otherwise) is not dissimilar to the problem of price discovery in a market where a large share of assets is held by buy-and-hold investors who rarely trade (it doesn't matter if they are total index holders, slide-and-dicers, or even individual stock holders, so long as they do not trade much).

I believe it has been shown that the market can set prices efficiently even when only a small fraction of shareholders are "active investors" (who make relatively frequent trades based on "fundamentals").

If so, could the same be true for corporate stewardship?

How large a share of all shareholders needs to be actively involved in corporate stewardship for corporate governance to remain effective?

In fact, might it be better if the passive total market cap investors stayed out of governance? After all, their interests are not the same that the interests of investors in individual companies are. If I own both Ford and GM, I may not be that invested in one of them outcompeting another.
The difference is that there are annual proxy votes that are voted by especially buy and hold investors as well as activist investors (think Carl Icahn, etc....). The governance issues are really in the end related on how the funds (or any shareholder) votes those issues. I see indexing as a method of removing interested parties from having a meaningful say. I am interested in how each company performs and how is discharges its various duties (I would prefer that GM AND Ford perform well).

For example, I owed PEG for 35 years and spent meaningful time each year deciding how to vote my proxies. I did not always vote with management. Today, since I swapped those shares into effectively VTSAX, I no longer spend any time influencing that (or any other) company directly. I depend upon Vanguard to do that. My concern is how do they decide how to make those decisions and is it good that I have delegated that role. I believe the answer for me is no, it is not good that I delegated it, but I am not sure how to resolve that conundrum.

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Re: FT article: "Pension funds raise concern over index manager stewardship"

Post by Vulcan » Tue Jun 25, 2019 2:34 pm

retiringwhen wrote:
Tue Jun 25, 2019 11:25 am
Vulcan wrote:
Tue Jun 25, 2019 10:36 am
afan wrote:
Mon Jun 24, 2019 7:47 pm
But what if a small number of index funds held a large share of the market? That is the situation now and the continued growth of the big three will make this even more in the future. So now one of the big index funds can spend money on better stewardship and capture a large share of the gains. If the big three index fund operators were to agree on a vote for a particular company, they could pretty much force whatever solution they chose.
I believe it has been shown that the market can set prices efficiently even when only a small fraction of shareholders are "active investors" (who make relatively frequent trades based on "fundamentals").

If so, could the same be true for corporate stewardship?

How large a share of all shareholders needs to be actively involved in corporate stewardship for corporate governance to remain effective?

In fact, might it be better if the passive total market cap investors stayed out of governance? After all, their interests are not the same that the interests of investors in individual companies are. If I own both Ford and GM, I may not be that invested in one of them outcompeting another.
The difference is that there are annual proxy votes that are voted by especially buy and hold investors as well as activist investors (think Carl Icahn, etc....). The governance issues are really in the end related on how the funds (or any shareholder) votes those issues. I see indexing as a method of removing interested parties from having a meaningful say. I am interested in how each company performs and how is discharges its various duties (I would prefer that GM AND Ford perform well).
The question is, do collective owners (indexers, and MF customers in general) have meaningfully different stewardship preferences over the "market average" individual ones?

If not, then there is no problem. The "market average" stewardship will set the company direction just as well as market makers set its stock prices.

If they do, are those preferences "good for the company"? One of the fears of indexing is that it diminishes the push towards intra-industry competition. If I own AA and Delta, it doesn't matter to me how they split the market so long as their combined business is growing. This may not be the case for someone who owns AA but not Delta.
If you torture the data long enough, it will confess to anything. ~Ronald Coase

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Re: FT article: "Pension funds raise concern over index manager stewardship"

Post by afan » Tue Jun 25, 2019 3:49 pm

retiringwhen wrote:
Tue Jun 25, 2019 11:25 am


For example, I owed PEG for 35 years and spent meaningful time each year deciding how to vote my proxies. I did not always vote with management. Today, since I swapped those shares into effectively VTSAX, I no longer spend any time influencing that (or any other) company directly. I depend upon Vanguard to do that. My concern is how do they decide how to make those decisions and is it good that I have delegated that role. I believe the answer for me is no, it is not good that I delegated it, but I am not sure how to resolve that conundrum.
This is something to worry about if you believe that your insights are so valuable that the large corporations would become less successful if they lost access to your wise counsel. If you have no reason to think that your opinions are exceptionally valuable (example: how many major companies have invited you to join their boards?) then there is no reason to think that voting your proxies, or not, would make any difference in the performance of the stocks you own.

It is only on issues immediately related to business performance that shareholder voting has value. Holding the senior leadership responsible for their actions, limiting CEO compensation, preventing obstructionist policies that attempt to block changing the board membership and so forth.

Many proxies are about forcing companies to adopt political views that have nothing to do with corporate performance. I am happy to let my index fund managers distinguish between issues that can work in favor of shareholders and issues that are proposed to advance someone's political views. I am happy to let my fund manager vote for better corporate performance and against political proposals, which is what I think they do now.
We don't know how to beat the market on a risk-adjusted basis, and we don't know anyone that does know either | --Swedroe | We assume that markets are efficient, that prices are right | --Fama

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Re: FT article: "Pension funds raise concern over index manager stewardship"

Post by retiringwhen » Tue Jun 25, 2019 4:09 pm

afan wrote:
Tue Jun 25, 2019 3:49 pm
This is something to worry about if you believe that your insights are so valuable that the large corporations would become less successful if they lost access to your wise counsel. If you have no reason to think that your opinions are exceptionally valuable (example: how many major companies have invited you to join their boards?) then there is no reason to think that voting your proxies, or not, would make any difference in the performance of the stocks you own.

It is only on issues immediately related to business performance that shareholder voting has value. Holding the senior leadership responsible for their actions, limiting CEO compensation, preventing obstructionist policies that attempt to block changing the board membership and so forth.

Many proxies are about forcing companies to adopt political views that have nothing to do with corporate performance. I am happy to let my index fund managers distinguish between issues that can work in favor of shareholders and issues that are proposed to advance someone's political views. I am happy to let my fund manager vote for better corporate performance and against political proposals, which is what I think they do now.
I with you 100% on paragraphs 1 and 2 with the caveat, that I vote my proxies for the same reason I vote in my township, county, state and federal elections. I believe my vote "counts" in the sense of contributing to the consensus. I believe that is necessary as a balance in corporation governance.

I fall of the wagon here when you state "I am happy to let my index fund managers distinguish between issues that can work in favor of shareholders and issues that are proposed to advance someone's political views." The reason is that in the last 2 years Vanguard, Fidelity and just about every fund complex has been under pressure and have specifically made choices that are fundamentally political in nature. Directly to my personal concern, they directly conflict with my political and moral views. I am concerned that I will have to divest of my funds to continue to hold those values in an actionable manner. I am not alone on this and in fact people who hold antithetical views to myself are likely more at risk of this today (maybe not forever).

I am looking at this for the long-term view (40+ years) and I don't see the stale-mate to luke-warm political positioning holding over that term with the current legal system of proxy voting by investment companies. Finding a way to return some of the control to the investment company shareholders is the only (still vague) scheme I have identified to address the problem.

As an aside, I not sure we'd even get consensus among the posters to this forum topic on whether issues such as CEO compensation are actually political or performance-based.

This is not a simple problem, because individuals are actually different. The current system does not allow for the flourishing of that individuality in the same manner that was dominant even a generation ago when holding individual common stocks was more the norm.

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Re: FT article: "Pension funds raise concern over index manager stewardship"

Post by retiringwhen » Tue Jun 25, 2019 4:11 pm

Vulcan wrote:
Tue Jun 25, 2019 2:34 pm
The question is, do collective owners (indexers, and MF customers in general) have meaningfully different stewardship preferences over the "market average" individual ones?

If not, then there is no problem. The "market average" stewardship will set the company direction just as well as market makers set its stock prices.

If they do, are those preferences "good for the company"? One of the fears of indexing is that it diminishes the push towards intra-industry competition. If I own AA and Delta, it doesn't matter to me how they split the market so long as their combined business is growing. This may not be the case for someone who owns AA but not Delta.
Your first statement is an interesting point and I have no idea of the answer. something to research....

As to the second, I always think that the intra-industry argument against indexing is irrelevant. Governance issues are largely out of scope of what a shareholder votes upon except in the case of mergers, etc. Why would I vote differently on a shareholder proposals or BoD nominees if I both companies? If I have an ESG preference, I will vote for it for all my shares regardless, not? I wouldn't change my vote because I own more or less Airline stocks. Again outside of mergers and acquisitions that require share-holder approval, I can't think of a situation where a competitive position is really up for a vote.

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Re: FT article: "Pension funds raise concern over index manager stewardship"

Post by palaheel » Tue Jun 25, 2019 6:23 pm

I worry about the definition of "stewardship." There are precious few topics with unanimous agreement, and those precious few topics are, by definition, noncontroversial. They're already baked into companies' behaviors. For the vast majority of other topics, why would I trust Vanguard or Fidelity or "whoever"'s opinions? If you're on one side or the other of a controversy, let your voice be heard. But don't think that delegating your vote will always put you on the side you would have chosen anyway.
Markets crash. Markets recover. Inflation takes your money FOREVER.

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