The Money Mustache Community
Learning, Sharing, and Teaching => Investor Alley => Topic started by: bigchrisb on July 14, 2014, 05:44:08 PM
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I saw this article about the growth and growth of vanguard: http://www.ft.com/cms/s/0/c54941ce-0b22-11e4-ae6b-00144feabdc0.html#axzz37UNB0xhz (http://www.ft.com/cms/s/0/c54941ce-0b22-11e4-ae6b-00144feabdc0.html#axzz37UNB0xhz)
And it got me thinking about concentration. Most people here are followers of the low cost index approach, and I believe users of Vanguard. With Vanguard controlling approx $2.1T in assets, and a global market cap of approx $50T (world bank), that would suggest that Vanguard has control over approx 4% of global capital. (nb- I don't know if I'm comparing apples with apples here, as I'm not sure if bonds are included in one or both, but the point remains, its a few percent of global assets).
At what point does this start becoming a systemic risk? Vanguard gets a lot of praise for many reasons (and I use them for much of my investment), but as pointed out, some issues are a bit hazy - such as remuneration etc. Perhaps the thing that plays most on my mind is the role of shareholder voting in corporate governance - i.e. if the board is being too mis-aligned with shareholders interests, shareholders can vote for change.
Anyone have any thoughts on what level (percentage) of passive investment becomes a systemic market risk, through corp governance?
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At what point does this start becoming a systemic risk? Vanguard gets a lot of praise for many reasons (and I use them for much of my investment), but as pointed out, some issues are a bit hazy - such as remuneration etc. Perhaps the thing that plays most on my mind is the role of shareholder voting in corporate governance - i.e. if the board is being too mis-aligned with shareholders interests, shareholders can vote for change.
Anyone have any thoughts on what level (percentage) of passive investment becomes a systemic market risk, through corp governance?
At least once per year (for at least the last decade) a journalist "discovers" that Fidelity Investments can account for up to 10% of daily market activity, and then they express their concern that Ned Johnson could manipulate or even crash the market.
I think that as long as one company has less than 50% of the market (for whatever duration and type) then the rest of the companies will be able to align against them and keep them from controlling the pursuit of capitalism.
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- i.e. if the board is being too mis-aligned with shareholders interests, shareholders can vote for change.
There are 2 related issues I see here:
(1) in the market itself, passive investors are piggybacking off active investors and arbitragers to maintain roughly accurate pricing.
(2) Similarly at AGM's, (im not sure what passive investor voting policies are...) if passive investors don't vote, they are relying on active investors and super funds to vote 'correctly'.
I think it will be OK in the long run, because as the proportion of passive investors increase, the opportunities for active investors will also increase. And so there will be an incentive to become an active investor (or invest with an active manager). So the proportion of active/passive will revert to the mean in the long run.
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In my view, there is no level where indexing becomes a systemic risk. In a world where everybody indexed and all corporate proposals are automatically voted yes on, we would just change the rules of the game to reflect the new reality.
This question inherently assumes that if everybody indexed, every other variable would remain constant. Of course, that could never happen. The entire system would just adapt in unexpected ways.
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And it got me thinking about concentration ... At what point does this start becoming a systemic risk? Vanguard gets a lot of praise for many reasons (and I use them for much of my investment), but as pointed out, some issues are a bit hazy - such as remuneration etc. Perhaps the thing that plays most on my mind is the role of shareholder voting in corporate governance - i.e. if the board is being too mis-aligned with shareholders interests, shareholders can vote for change.
Anyone have any thoughts on what level (percentage) of passive investment becomes a systemic market risk, through corp governance?
I'm with kyle, in that I think the market would naturally shift and rules would change if that scenario became a reality.
I'm also of the opinion that it won't, due to human psychology, the same way I'm not worried about "what if everyone retired," for the same reasons - I think things would shift and adapt and we'd be okay if it did happen, but I don't think it's a plausible scenario.
Also, not quite what you're talking about, but along the lines of systemic risk of putting all your money into Vanguard and the risk that goes along with that: http://jlcollinsnh.com/2012/09/07/stocks-part-x-what-if-vanguard-gets-nuked/
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Great link ARS.
Vanguard rocks.
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Bigchris, that link seems to be to a paid subscription article which I can't access.
Just like the 3 other links I tried to follow today.
Sorry for the complainypants vent but can people please not post links to paid subscription articles unless they are prepared to summarise the info into their post so everybody can read it. It's incredibly frustrating for those of us who are not prepared to spend money on a subscription :-)
Thanks \rant
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Bigchris, that link seems to be to a paid subscription article which I can't access.
Just like the 3 other links I tried to follow today.
Sorry for the complainypants vent but can people please not post links to paid subscription articles unless they are prepared to summarise the info into their post so everybody can read it. It's incredibly frustrating for those of us who are not prepared to spend money on a subscription :-)
Thanks \rant
Technically the FT website is asking you to register for "free" in order to read a quota of articles per month, but you're not paying for a subscription.
You can use the Google backdoor hack into the website:
1. Read the title of the post.
2. Copy&paste or type the title of the post into Google.
3. The website you're seeking will probably be the top result (or the #2 result). Click on that link.
4. Enjoy the read.
This works for the WSJ, NYT, most of the FT, and perhaps many other registration or paywall websites.
https://www.google.com/search?q=%22Vanguard+funds+prosper+by+low+cost+evangelism%22&oq=%22Vanguard+funds+prosper+by+low+cost+evangelism%22
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Bigchris, that link seems to be to a paid subscription article which I can't access.
Just like the 3 other links I tried to follow today.
Sorry for the complainypants vent but can people please not post links to paid subscription articles unless they are prepared to summarise the info into their post so everybody can read it. It's incredibly frustrating for those of us who are not prepared to spend money on a subscription :-)
Thanks \rant
Sorry, wasn't paywalled when I posted it.
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Thanks for explaining. I'll try the backdoor way. I assumed it was paywalled because when I chose not to sign up it took me to a completely different story.
Sorry Bigchris, you're not to know what happens when someone else clicks on the link. I didn't mean to take out my frustration on you but I've had a bit of bother today with trying to follow links :C