Recently Vanguard mutual funds assets reached $6tn in value and its rival BlackRock has about $7tn to manage. On one hand index and pension funds manager have enormous voting power over the companies. To put this into prospective, total capitalization of S&P500 is $28tn (as a comparison British FTSE 100 and FTSE 250 combined are $3tn and German DAX is about $1.5tn).
On there other hand there are more voices, which are echoing raised back in March 2018, that index fund strategies are essentially a piggy back on stock pickers and a handful of people manage the large number of companies. This is not how capitalism traditionally works and the risk is that stock market will become inefficient.
Vanguard is doing some things other funds don’t do: it is owned by its own funds, allowing it to use profits after covering costs and business investments to lower its fees, rather than reward outside shareholders with dividends and buybacks.
The Vanguard does a lot of good - average expense ratio in the US is 0.1 percent ($6 billion in fees), while average in the US is 0.58 percent. The Vanguard overcame bureaucracy and corruption in the UK – its going to launch is first Self-Invested Personal Pension (a pension plan that enables the holder to choose and manage). This is equivalent of 401K in the USA. of my “hundred years old” bank which was charging me 1.25% for the privilege of keeping my pension to a corporately negotiated scheme with 0.26% annual fees. The Vanguard SIPP will charge an annual account fee of 0.15%, capped at $500 per year (No fees increase as soon as you have over $333K on the account). It will be the cheapest option for anybody in the UK who has more than $55K in pension savings (even with the corrupt and misleading reporting practices).
Still there is an unease. Is it becoming too big to fail? Who is going to build S&P500? It used to be done by stock pickers and analysts. Passive index funds exploited a hole in the stock pickers business model.
Although I am still shocked that 80% of the market still controlled by the stock pickers. In twenty years top three index fund management companies will control 40% of the S&P500 (by 2040). In practical terms it will mean than ten to twenty people will set agenda for the US corporate world. The Vanguard founder before he passed away in 2019 wrote that that if index funds owned more than 50 per cent of the stock market it would not “serve the national interest”.
What is the practical take for me? I feel that I adequately diversified my assets over S&P500, emerging markets and western europe. The remaining risks as I see them: keeping everything with one investment company and all in the investment funds. On of the possible solutions is to think about different investment and the holding company. Partially I did it with my pension, but the volume is about 9 percent of my financial independence nest egg size outside of Vanguard.
Do you share these concerns? What is your view on the index fund dominance and few big mega players in the industry?