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Here's today's John Rekenthaler column on Morningstar:
http://news.morningstar.com/articlenet/ ... 76#cpage=1
From the Beginning
This column is a companion to August's "Are Index Funds Too Soft on CEOs?" That article began in medias res, but unlike a proper epic, it never got around to the beginning. This time I will take the matter in proper linear order, along the way offering additional thoughts, as I have had another month to think through the issue.
To start: There will always be arguments against indexing. If passive funds never existed, traditional fund managers would be collecting an additional $40 billion in annual fees (roughly speaking, $5 trillion held by index mutual funds and exchange-traded funds times 0.80% for actively managed funds' expense ratios). When $40 billion are put into play, people fight.
If those people are the direct competition, they can reliably be ignored. I have never heard a sound argument against indexing advanced by active managers. Indeed, I can extend that lesson: I have never heard a sound argument against any investment practice coming from those would profit if they are believed.
(Which calls into question the standard premise of economists that money is the supreme motivator. Active investment managers have a huge financial incentive to discredit indexing, but their efforts have been woefully lax. Only a handful of active managers, chief among them American Funds, have researched the subject. The rest simply wave their arms and chant bumper-sticker homilies.)
Academic research is a different matter, which most journalists understand. That is why "Common Ownership, Competition, and Top Management Incentives," an as-yet unpublished paper by four professors (Miguel Anton, Florian Ederer, Mireia Gine, and Martin Schmalz), has attracted so much media attention. The paper's claims underlie a host of recent strikes against indexing from the popular press, for example, "The Worst-Case Scenario for Passive Investing," by Bloomberg columnist Stephen Gandel, or "Vanguard Group is America's new landlord," published on philly.com. . . .
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I don't know, what evidence is their that active fund managers would use their ownership of company shares to force management to make changes beneficial to the shareholder? The average holding period for a stocks in an active fund might be one year or at most two years. This is hardly a long term investment. I know Peter Lynch used to do company visits and would talk to management of firms he was invested in or considering for investment. I don't know if this practice is increasing, the same, or decreasing. Management would be interested in talking to an active manager because an investment in their company's shares would boost their stock price. Since average holding periods by active funds have decreased over time, corporate managers know that active funds will likely not be longer term investors. Pretty much the shareholder activists and the leveraged buy-out people can pressure managements.
I own shares individually but don't get around to voting all of my proxies. A lot of those arrive during tax season, which is a busy time of the year for me. In any case, my votes are pretty miniscule and will make little if any difference in the way that corporate managements operate. I mostly vote with the Board recommendations but I always vote to split the CEO and Board Chairman responsibilities.
Index funds, on the other hand, are likely to own shares for many years at a time. If a company like Vanguard chose to, it could have an effect upon corporate stewardship. Vanguard could, for example, take a stand against excessive executive compensation.
A fool and his money are good for business.
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To accept the premise, one has to believe more than just that active managers would TRY to get companies to make changes that improve corporate performance.
One has to believe that active managers would know what those changes would be. This requires that they know better than do the people running the corporation. Maybe they do, but that is something to be demonstrated, not assumed.
One also has to believe that, but for the intervention of active managers, the people running the corporation would not make those changes.
There are certainly things that active investors could do in theory. They could demand that CEO pay not exceed some multiple of average worker pay with the ratio being similar to what we see in Europe. That money, and the reduced pay of executives below the CEO level, could be returned to shareholders.
Given how much attention there has been to this issue, and how little action, I doubt one could expect active managers to do anything about it.
We don't know how to beat the market on a risk-adjusted basis, and we don't know anyone that does know either |
We assume that markets are efficient, that prices are right |
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gkaplan wrote: ↑
Tue Sep 19, 2017 6:52 pm
Academic research is a different matter, which most journalists understand.
This assumption in the article is highly questionable and unravels the rest of the piece. For example, the media attention paid to that unpublished paper misconstrues its argument as one against indexing as opposed to one against concentration of ownership broadly - that is, diversified active funds are just as much a part of the problem as passive funds are.