Will the index funds save us?

Discuss all general (i.e. non-personal) investing questions and issues, investing news, and theory.
Post Reply
Topic Author
ARoseByAnyOtherName
Posts: 1000
Joined: Wed Apr 26, 2017 12:03 am

Will the index funds save us?

Post by ARoseByAnyOtherName »

The inimitable Matt Levine:
https://www.bloomberg.com/opinion/artic ... t-a-winner

He writes:
I will say that if I ran one of the big index-fund companies, and a pharmaceutical company in my portfolio developed a patented fully effective cure for Covid-19 that it could manufacture cheaply and planned to sell to anyone who could pay $50,000 a dose, I would call that company right up and say “no, you give that pill away for free, because the value to me of Covid-19 going away quickly and the economy recovering—the value to me as an owner of airlines and hotels and chain restaurants and retailers and every other company—is vastly, vastly greater than the value to me of your profits on that pill.” Strictly as a financial matter I mean, strictly as a matter of my fiduciary duty to my investors. I would call my index-fund-manager friends and tell them to do the same thing, and between us we might own enough shares of the company’s stock to make it do what we want. Later the antitrust authorities would ask us some uncomfortable questions about our conversations, but in these extreme circumstances that is a risk I’d live with.
And then quotes from this recent Financial Times article:
https://www.ft.com/content/b452ceb9-765 ... 73d736f92a
The world’s biggest investors are urging drugmakers to collaborate on developing a coronavirus vaccine to end a crisis that has unleashed market turmoil and hammered returns for pension funds across the world.

BlackRock, the world’s largest asset manager, Fidelity Investments and sister company Fidelity International, Aviva Investors, Janus Henderson and Amundi, Europe’s largest asset manager, all told the Financial Times that they want drug companies to put aside any qualms about collaborating with rivals. …
And:
A separate group of more than 50 investors, managing more $2.5tn in assets, will next week step up the pressure by writing to more than a dozen global pharmaceutical companies. The letter will ask the groups to share any relevant findings on a vaccine and other treatments as well as to drop any enforcement of relevant patents.
Actionably:
Maybe we should all call up Vanguard and tell them to get in on that action?
sycamore
Posts: 1317
Joined: Tue May 08, 2018 12:06 pm

Re: Will the index funds save us?

Post by sycamore »

ARoseByAnyOtherName wrote: Mon Apr 27, 2020 7:44 am ...
Maybe we should all call up Vanguard and tell them to get in on that action?
Thanks for raising this topic, it spurred some discussion here at my home this morning.

In general I'm been disinclined to have index funds use their ownership heft to push one policy position or another on companies. I'm not interested in my index fund provider (Vanguard or Fidelity or BlackRock) taking on the role of speaking up for one position or another - it's my responsibility as a citizen to speak up; Vanguard may not support the position I hold; I want index funds to be simply index funds that spread my investment across a set of companies, and not a some kind of agent/force for change; etc.

On the other hand, if I held an actively-managed fund with mandate for something like "support companies that pool their resources to solve crisis X or Y or Z" then sure I'd want the fund to use its shareholder power as influence.

For COVID-19 I can see how it's harder to support my position given that the benefits of sharing intellectual property or manufacturing/distribution capabilities seems so valuable and (as you noted) could improve the economic outcome of the index fund.

But to answer your above question: no, not "all" of us should do that. Those who support using shareholder pressure should call/email Vanguard. Others could call/email the pharmaceutical companies directly.
User avatar
firebirdparts
Posts: 1872
Joined: Thu Jun 13, 2019 4:21 pm

Re: Will the index funds save us?

Post by firebirdparts »

I have posted several times, I would like to see them bring the sort of cost reduction to corporate governance that they did to investing. They seem pretty restrained in their efforts to 'do good' with that big ownership position. They may be concerned about inviting new laws against themselves.
A fool and your money are soon partners
User avatar
SimpleGift
Posts: 3869
Joined: Tue Feb 08, 2011 3:45 pm
Location: Central Oregon

Re: Will the index funds save us?

Post by SimpleGift »

ARoseByAnyOtherName wrote: Mon Apr 27, 2020 7:44 am Maybe we should all call up Vanguard and tell them to get in on that action?
A bad idea, in my view. The Federal Trade Commission has already held hearings on the antitrust implications of "common ownership" of non-controlling interests in competing companies, by index funds, mutual funds and other asset managers.

FTC Hearings Examine the Antitrust Implications of Common Ownership

While it may be fine for the big pharmaceutical companies to be working together, Blackrock, Vanguard, Fidelity, etc. should not be seen as collaborating with the companies they own, even in the socially-beneficial area of vaccine development. It would likely come to bite them in antitrust actions (or further scrutiny) down the road, I believe.
Dominic
Posts: 409
Joined: Sat Jul 02, 2016 11:36 am

Re: Will the index funds save us?

Post by Dominic »

firebirdparts wrote: Mon Apr 27, 2020 9:06 am I have posted several times, I would like to see them bring the sort of cost reduction to corporate governance that they did to investing. They seem pretty restrained in their efforts to 'do good' with that big ownership position. They may be concerned about inviting new laws against themselves.
I would have to imagine that this is a lot less controversial than the topic mentioned in the OP. Index funds pushing a company to be more profitable (e.g. by reducing executive compensation) helps all shareholders in that company. It's acting in the best interest of the company itself, and in turn benefits the funds.

I'd personally like to see what is suggested in the OP, but indexers throwing their weight around to reduce a handful of companies' profits seems like it's asking for legal trouble, even if it does benefit the funds and their shareholders.
qwertyjazz
Posts: 1261
Joined: Tue Feb 23, 2016 4:24 am

Re: Will the index funds save us?

Post by qwertyjazz »

Actionable question I think. Is anti-trust a risk of holding a single fund or company? I have not seen that usually listed as reasons to diversify ownership among multiple companies Vamguatd Fidelity etc. Has the FTC even weighed in on something similar in the past?

Thank you
QJ
G.E. Box "All models are wrong, but some are useful."
User avatar
SimpleGift
Posts: 3869
Joined: Tue Feb 08, 2011 3:45 pm
Location: Central Oregon

Re: Will the index funds save us?

Post by SimpleGift »

qwertyjazz wrote: Mon Apr 27, 2020 9:52 am Actionable question I think. Is anti-trust a risk of holding a single fund or company? I have not seen that usually listed as reasons to diversify ownership among multiple companies Vamguatd Fidelity etc. Has the FTC even weighed in on something similar in the past?
From the vantage point of an individual investor, I'd say no, it's not at all a concern.

But from the perspective of the index fund industry as a whole, all the antitrust talk around common ownership of companies by index funds may be an existential concern somewhere down the road. Reading the papers in support of antitrust actions (find them in the footnotes to the FTC hearing link upthread), they don't hold much water in my mind. But this is a way the active-management wing of the financial services industry can attack the legality of the index fund wing.
megabad
Posts: 3146
Joined: Fri Jun 01, 2018 4:00 pm

Re: Will the index funds save us?

Post by megabad »

ARoseByAnyOtherName wrote: Mon Apr 27, 2020 7:44 am
Actionably:
Maybe we should all call up Vanguard and tell them to get in on that action?
Philosophically, I can’t support any significant action.I am a free market proponent and simply want to own the market as defined by others (for the most part). Any significant action by Vanguard or other provider would be contrary to the prospectus goals of the fund as written.
User avatar
JoMoney
Posts: 9842
Joined: Tue Jul 23, 2013 5:31 am

Re: Will the index funds save us?

Post by JoMoney »

megabad wrote: Mon Apr 27, 2020 12:37 pm
ARoseByAnyOtherName wrote: Mon Apr 27, 2020 7:44 am
Actionably:
Maybe we should all call up Vanguard and tell them to get in on that action?
Philosophically, I can’t support any significant action.I am a free market proponent and simply want to own the market as defined by others (for the most part). Any significant action by Vanguard or other provider would be contrary to the prospectus goals of the fund as written.
I would not consider myself a "free market proponent" (I don't believe it's a realistic goal to ignore environmental, labor, or other concerned interests not involved in a producer/consumer transaction... not to mention the asymmetrical advantages producers have over consumers)... but I also don't consider it the business owner or Vanguard's role to look after those interests. That's what government is for.
What I have been grappling with, is a certain contradiction of being a "passive investor" but wanting a not-so-passive say influencing the company. I know I definitely would not want someone to be lobbying Vanguard to vote my shares for someone else's interest that may not align with mine. The primary rights a shareholder has is to vote their shares or sell them, both of which they abdicate when buying a mutual fund. It seems to me "passive investing" does not mesh well at all with the idea of taking an active interest in how the company operates.
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham
megabad
Posts: 3146
Joined: Fri Jun 01, 2018 4:00 pm

Re: Will the index funds save us?

Post by megabad »

JoMoney wrote: Mon Apr 27, 2020 1:47 pm seems to me "passive investing" does not mesh well at all with the idea of taking an active interest in how the company operates.
I certainly agree with this. I think this is why the industry has started so many ESG funds (not that these are necessarily a perfect solution).
Independent George
Posts: 985
Joined: Wed Feb 17, 2016 12:13 pm
Location: Chicago, IL, USA

Re: Will the index funds save us?

Post by Independent George »

I would also add that if any pharmaceutical company were to develop a magic pill, I think it would be a good thing if they made a fortune from it. They will have earned it, and it ensures that they'll make a good faith effort into developing drugs for the next pandemic.

At the very least, if the US government were to take it under eminent domain (I don't know if there's any precedent for claiming intellectual property rather than physical property under eminent domain), they would be obligated by the constitution to pay a presumably astronomical sum of money for it.
Topic Author
ARoseByAnyOtherName
Posts: 1000
Joined: Wed Apr 26, 2017 12:03 am

Re: Will the index funds save us?

Post by ARoseByAnyOtherName »

sycamore wrote: Mon Apr 27, 2020 8:36 am
ARoseByAnyOtherName wrote: Mon Apr 27, 2020 7:44 am ...
Maybe we should all call up Vanguard and tell them to get in on that action?
Thanks for raising this topic, it spurred some discussion here at my home this morning.

In general I'm been disinclined to have index funds use their ownership heft to push one policy position or another on companies. I'm not interested in my index fund provider (Vanguard or Fidelity or BlackRock) taking on the role of speaking up for one position or another - it's my responsibility as a citizen to speak up; Vanguard may not support the position I hold; I want index funds to be simply index funds that spread my investment across a set of companies, and not a some kind of agent/force for change; etc.

On the other hand, if I held an actively-managed fund with mandate for something like "support companies that pool their resources to solve crisis X or Y or Z" then sure I'd want the fund to use its shareholder power as influence.

For COVID-19 I can see how it's harder to support my position given that the benefits of sharing intellectual property or manufacturing/distribution capabilities seems so valuable and (as you noted) could improve the economic outcome of the index fund.
Yup, that's effectively the argument here, that's it's less of a "policy position" (I get what you mean) and instead more like:

1. I run an index fund that invests in the entire market.
2. The entire market has been crushed because of COVID-19.
3. If I use my position as part-owner of the entire market maybe I can convince drug companies to work together to get us "back to normal" much quicker than if they each went at it alone.
4. The quicker we're back to normal the quicker the entire market gets un-crushed.
5. Hey maybe I can call all my buddies who also run index funds and we can do this together!

That's less a "policy position" which I interpret as more something tangentially related to my business or the business's business. It's pretty weird and strange but also given the extreme circumstances fairly justifiable - that's the argument Matt Levine makes, and one I'm sympathetic to.

Thought experiment. What if everyone who owned a share of VTI (Vanguard Total Stock Market Index Fund ETF) called Vanguard and made them join in, and they did, and they strongarmed all these drug companies, and working together we got a vaccine out to everyone in say 4 months.

Would be justifiable? Would it be the right thing to do?
Topic Author
ARoseByAnyOtherName
Posts: 1000
Joined: Wed Apr 26, 2017 12:03 am

Re: Will the index funds save us?

Post by ARoseByAnyOtherName »

Independent George wrote: Mon Apr 27, 2020 3:03 pm
At the very least, if the US government were to take it under eminent domain (I don't know if there's any precedent for claiming intellectual property rather than physical property under eminent domain), they would be obligated by the constitution to pay a presumably astronomical sum of money for it.
What? Where in the Constitution does it say "if there's a virus and the government takes the cure it has to pay the company a massive pile of hundos"?

What if the government passes a law that basically says "give me the cure now"?
1130Super
Posts: 523
Joined: Thu Nov 07, 2019 8:59 am
Location: Minnesota

Re: Will the index funds save us?

Post by 1130Super »

ARoseByAnyOtherName wrote: Mon Apr 27, 2020 6:26 pm
Independent George wrote: Mon Apr 27, 2020 3:03 pm
At the very least, if the US government were to take it under eminent domain (I don't know if there's any precedent for claiming intellectual property rather than physical property under eminent domain), they would be obligated by the constitution to pay a presumably astronomical sum of money for it.
What? Where in the Constitution does it say "if there's a virus and the government takes the cure it has to pay the company a massive pile of hundos"?

What if the government passes a law that basically says "give me the cure now"?
Then why would these companies pay any money for research if they don’t get a good return on their investment?
Balance1969
Posts: 11
Joined: Wed Nov 06, 2019 4:33 pm

Re: Will the index funds save us?

Post by Balance1969 »

ARoseByAnyOtherName wrote: Mon Apr 27, 2020 6:26 pm
Independent George wrote: Mon Apr 27, 2020 3:03 pm
At the very least, if the US government were to take it under eminent domain (I don't know if there's any precedent for claiming intellectual property rather than physical property under eminent domain), they would be obligated by the constitution to pay a presumably astronomical sum of money for it.
What? Where in the Constitution does it say "if there's a virus and the government takes the cure it has to pay the company a massive pile of hundos"?

What if the government passes a law that basically says "give me the cure now"?
Fifth Amendment:
nor shall private property be taken for public use, without just compensation
nigel_ht
Posts: 1363
Joined: Tue Jan 01, 2019 10:14 am

Re: Will the index funds save us?

Post by nigel_ht »

1130Super wrote: Mon Apr 27, 2020 6:33 pm
ARoseByAnyOtherName wrote: Mon Apr 27, 2020 6:26 pm
Independent George wrote: Mon Apr 27, 2020 3:03 pm
At the very least, if the US government were to take it under eminent domain (I don't know if there's any precedent for claiming intellectual property rather than physical property under eminent domain), they would be obligated by the constitution to pay a presumably astronomical sum of money for it.
What? Where in the Constitution does it say "if there's a virus and the government takes the cure it has to pay the company a massive pile of hundos"?

What if the government passes a law that basically says "give me the cure now"?
Then why would these companies pay any money for research if they don’t get a good return on their investment?
https://other98.com/taxpayers-fund-phar ... velopment/

https://www.thebalance.com/who-funds-bi ... ch-2663193

https://thehill.com/opinion/healthcare/ ... cly-funded

Looks like a large chunk of R&D is funded by taxpayers already.

“In reality, companies receive substantial publicly-funded support from the government. A recent study found that all 210 drugs approved in the U.S. between 2010 and 2016 benefitted from publicly-funded research, either directly or indirectly.

Taxpayers contribute through public university research, grants, subsidies, and other incentives. This means people are often paying twice for their medicines: through their tax dollars and at the pharmacy.”

They can keep all the profits they want from viagra. For a covid medicine they can pony up or get blacklisted from any USG funding henceforward as far as I’m concerned.
nigel_ht
Posts: 1363
Joined: Tue Jan 01, 2019 10:14 am

Re: Will the index funds save us?

Post by nigel_ht »

Balance1969 wrote: Mon Apr 27, 2020 6:44 pm
ARoseByAnyOtherName wrote: Mon Apr 27, 2020 6:26 pm
Independent George wrote: Mon Apr 27, 2020 3:03 pm
At the very least, if the US government were to take it under eminent domain (I don't know if there's any precedent for claiming intellectual property rather than physical property under eminent domain), they would be obligated by the constitution to pay a presumably astronomical sum of money for it.
What? Where in the Constitution does it say "if there's a virus and the government takes the cure it has to pay the company a massive pile of hundos"?

What if the government passes a law that basically says "give me the cure now"?
Fifth Amendment:
nor shall private property be taken for public use, without just compensation
The probability that they did all the research with purely private funds is essentially zero. If the government doesn’t at least retain general use rights for patents developed with any public money then we need to overhaul how we do biomedical research grants.
Topic Author
ARoseByAnyOtherName
Posts: 1000
Joined: Wed Apr 26, 2017 12:03 am

Re: Will the index funds save us?

Post by ARoseByAnyOtherName »

SimpleGift wrote: Mon Apr 27, 2020 9:27 am
ARoseByAnyOtherName wrote: Mon Apr 27, 2020 7:44 am Maybe we should all call up Vanguard and tell them to get in on that action?
A bad idea, in my view. The Federal Trade Commission has already held hearings on the antitrust implications of "common ownership" of non-controlling interests in competing companies, by index funds, mutual funds and other asset managers.

FTC Hearings Examine the Antitrust Implications of Common Ownership

While it may be fine for the big pharmaceutical companies to be working together, Blackrock, Vanguard, Fidelity, etc. should not be seen as collaborating with the companies they own, even in the socially-beneficial area of vaccine development. It would likely come to bite them in antitrust actions (or further scrutiny) down the road, I believe.
Yes, it likely would... although maybe "will" is a better word. BlackRock, Fidelity, Aviva, Janus Henderson, Amundi, and 45 other companies are doing this today, based on the FT article.

Doesn't sound like Vanguard is. Maybe that's the right move. Or, maybe they will be on the wrong side of history.

To be clear I'm not knocking Vanguard here. I honestly don't know how I feel about this. It's a fascinating topic unfortunately provoked by a horrific deadly pandemic.
Topic Author
ARoseByAnyOtherName
Posts: 1000
Joined: Wed Apr 26, 2017 12:03 am

Re: Will the index funds save us?

Post by ARoseByAnyOtherName »

megabad wrote: Mon Apr 27, 2020 12:37 pm
ARoseByAnyOtherName wrote: Mon Apr 27, 2020 7:44 am
Actionably:
Maybe we should all call up Vanguard and tell them to get in on that action?
Philosophically, I can’t support any significant action.I am a free market proponent and simply want to own the market as defined by others (for the most part). Any significant action by Vanguard or other provider would be contrary to the prospectus goals of the fund as written.
As a free market proponent are you for or against the US government injecting more than $2 trillion into the economy?
junior
Posts: 1064
Joined: Wed Sep 10, 2008 6:14 pm
Contact:

Re: Will the index funds save us?

Post by junior »

Balance1969 wrote: Mon Apr 27, 2020 6:44 pm
ARoseByAnyOtherName wrote: Mon Apr 27, 2020 6:26 pm
Independent George wrote: Mon Apr 27, 2020 3:03 pm
At the very least, if the US government were to take it under eminent domain (I don't know if there's any precedent for claiming intellectual property rather than physical property under eminent domain), they would be obligated by the constitution to pay a presumably astronomical sum of money for it.
What? Where in the Constitution does it say "if there's a virus and the government takes the cure it has to pay the company a massive pile of hundos"?

What if the government passes a law that basically says "give me the cure now"?
Fifth Amendment:
nor shall private property be taken for public use, without just compensation
The private property in this case is presumably a government issued patent monopoly. The government could presumably pass a law declaring patent monopolies null and void and not pay any compensation. A patent monopoly is not a right guaranteed by the constitution.

At any rate the U. S. government is not going to do that so it's just a theoretical matter.
User avatar
JoMoney
Posts: 9842
Joined: Tue Jul 23, 2013 5:31 am

Re: Will the index funds save us?

Post by JoMoney »

junior wrote: Mon Apr 27, 2020 8:54 pm
Balance1969 wrote: Mon Apr 27, 2020 6:44 pm
ARoseByAnyOtherName wrote: Mon Apr 27, 2020 6:26 pm
Independent George wrote: Mon Apr 27, 2020 3:03 pm
At the very least, if the US government were to take it under eminent domain (I don't know if there's any precedent for claiming intellectual property rather than physical property under eminent domain), they would be obligated by the constitution to pay a presumably astronomical sum of money for it.
What? Where in the Constitution does it say "if there's a virus and the government takes the cure it has to pay the company a massive pile of hundos"?

What if the government passes a law that basically says "give me the cure now"?
Fifth Amendment:
nor shall private property be taken for public use, without just compensation
The private property in this case is presumably a government issued patent monopoly. The government could presumably pass a law declaring patent monopolies null and void and not pay any compensation. A patent monopoly is not a right guaranteed by the constitution.

At any rate the U. S. government is not going to do that so it's just a theoretical matter.
Since we're in the realm of conjecture, one might also dispute whatever "law" in court, the constitution does prohibit ex post facto laws ...
But then the government could just do it anyway, and even if it's decided to be unconstitutional they may have no practical way of being compensated (as in the Liberty Bond default case)
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham
megabad
Posts: 3146
Joined: Fri Jun 01, 2018 4:00 pm

Re: Will the index funds save us?

Post by megabad »

ARoseByAnyOtherName wrote: Mon Apr 27, 2020 8:48 pm
megabad wrote: Mon Apr 27, 2020 12:37 pm
ARoseByAnyOtherName wrote: Mon Apr 27, 2020 7:44 am
Actionably:
Maybe we should all call up Vanguard and tell them to get in on that action?
Philosophically, I can’t support any significant action.I am a free market proponent and simply want to own the market as defined by others (for the most part). Any significant action by Vanguard or other provider would be contrary to the prospectus goals of the fund as written.
As a free market proponent are you for or against the US government injecting more than $2 trillion into the economy?
I should have said “when I choose to invest in broad index funds, i consider it to be philosophically inconsistent with my investing intent if the fund acts as a direct impediment to a free market”. This better addresses my intent in context. Your more recently stated question is a complicated one that I believe would devolve most threads into politics (which I am rather indifferent to). I believe that government spending in general is inconsistent with free markets economically. This does not necessarily mean that I would disapprove of all government spending morally.
JonnyB
Posts: 688
Joined: Sun Jan 19, 2020 5:28 pm

Re: Will the index funds save us?

Post by JonnyB »

megabad wrote: Mon Apr 27, 2020 12:37 pm Philosophically, I can’t support any significant action.I am a free market proponent and simply want to own the market as defined by others (for the most part). Any significant action by Vanguard or other provider would be contrary to the prospectus goals of the fund as written.
That's a rather strange definition of "free market." It seems you want to be free of any decisions and let others, who you don't even know, be free to make all of your decisions for you.

I don't know what could be more "free market" than allowing the owners of a company to vote on membership of the board of directors and vote on their policies. Otherwise you have a dictatorship of executives and insiders.

A "free market" doesn't mean free from responsibility.
aristotelian
Posts: 8211
Joined: Wed Jan 11, 2017 8:05 pm

Re: Will the index funds save us?

Post by aristotelian »

Doesn't Vanguard also serve bond investors and stock sellers? As a broker, they should be neutral when it comes to market outcomes.
Post Reply