We can’t keep up. After banging the drum about their low fees and fiduciary favor, is industry conscience and investing elder statesman John Bogle having a change of heart about <squints> index funds?
The Vanguard founder took to the pages of The Wall Street Journal last week to ask a surprising, but important, question.
“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,” Bogle writes. “The question we need to ask ourselves now is: What happens if it becomes too successful for its own good?”
Initially known as Bogle’s folly, the index fund idea was dismissed, with some going so far as to call it (and by extension him) “un-American.”
While it struggled to attract attention and investors, today total index fund assets are more than $6 trillion, with 70 percent of that invested in broad market index funds similar to his original Vanguard fund.
However, he warns that “If historical trends continue, a handful of giant institutional investors will one day hold voting control of virtually every large U.S. corporation …These will be major issues in the coming era.”
Bogle notes that three index fund managers “dominate the field with a collective 81 percent share of index fund assets, names that shouldn’t surprise; Vanguard, BlackRock and State Street Global.
He then points to a number of solutions offered by academia, industry professionals and others to resolve this “concentration of corporate ownership,” some possible and some likely not. They include:
- More competition from new entrants to the index field.
- Force giant index funds to spin off their assets into a number of separate entities, each independently managed.
- Require index funds to hold just one company in any industry.
- Timely and full public disclosure by index funds of their voting policies and public documentation of each engagement with corporate managers.
- Require index funds to retain an independent supervisory board with full responsibility for all decisions regarding corporate governance.
- Limit the voting power of corporate shares held by index managers.
- Enact federal legislation making it clear that directors of index funds and other large money managers have a fiduciary duty to vote solely in the interest of the funds’ shareholders.
“It is time for public officials to consider the pros and cons of these issues with indexers, the financial community, academia, and active managers alike—and develop national policies that support high standards of corporate governance,” he concludes.
With more than 20 years serving financial markets, John Sullivan is the former editor-in-chief of Investment Advisor magazine and retirement editor of ThinkAdvisor.com. Sullivan is also the former editor of Boomer Market Advisor and Bank Advisor magazines, and has a background in the insurance and investment industries in addition to his journalism roots.
