3 ms·

This is cool, but incomplete. An index fund would still want competition if by competing, Pepsi gains 100% and Coke loses 1%. i.e., in any case where competitio

by obblekk 11y ago

This is cool, but incomplete. An index fund would still want competition if by competing, Pepsi gains 100% and Coke loses 1%. i.e., in any case where competition grows the pie rather than cuts it up differently, the index fund would want competition. I claim this is the right result. We should discourage competition where everyone ends off worse, and encourage competition otherwise. Individuals competing do things like dump goods below cost to bankrupt smaller competitors; an index would perhaps not do that.

praptak 11y ago
"Everyone ends off worse" - by a strange definition of everyone that leaves consumers out of the equation.
- obblekk 11y ago
  Well, consumers shouldn't be much worse off, otherwise it creates an arbitrage opportunity. Although Pepsi and Coke may be indexed, they aren't the same entity allowing investors to just own one. If there's some action that Pepsi could take that would massively reallocate the pie in it's favor (by winning over consumer for instance), then investors ought to start massing to it and becoming more activist. This would come at the expense of the index of course. So really as long as there's easy 'severability' of the companies in the index, they shouldn't be overtly monopolistic. But I agree in industries with high capital requirements (energy, biotech, etc.) it may be impossible to separate out the companies and then they would be de facto merged. This really is an interesting idea because a solution seems hard to find. Outright banning indexing would be nearly impossible to enforce (large pension funds could reproduce the index at a slighter higher cost).
  - theseatoms 11y ago
    > Well, consumers shouldn't be much worse off, otherwise it creates an arbitrage opportunity. Only if the industry has a low barrier to entry.
- davidw 11y ago
  Consumers would be better off avoiding both Coke and Pepsi, most likely, aside from a very occasional one. http://www.ncbi.nlm.nih.gov/pubmed/23488503 http://www.ncbi.nlm.nih.gov/pubmed/23488503
  - eru 11y ago
    Perhaps. But at any given level of consumption of Coke + Pepsi, consumers would benefit from lower prices.
mcguire 11y ago
I agree with you, but the article is making a pretty strong argument that indexing discourages competition in a way that makes everyone worse off. "[Elhauge:] 'Fourth, if index funds alone would create a problem of anticompetitive horizontal shareholding in a concentrated market, and those index funds feel the benefits of diversification across all firms in that market exceed the benefits of influencing corporate governance, they could commit not to communicate with management or vote their shares.'" I believe that is the case now: index funds don't vote or attempt to influence management (at least I've never heard of it). Also, each individual fund is limited in the proportion of an individual company it can own, but that limit does not apply to the total sum of index funds. "If you think that institutional investors are causing managers to stop competing, there are more plausible mechanisms for that than voting. Just leaving managers alone, for instance, probably itself tends toward anti-competitiveness: If shareholders don't pester management, they will probably compete less hard, just because that is easier. 'Voting with their feet' is another: If shareholders invest indifferently in both the best and the fourth-best firm in an industry, that will keep up the fourth-best firm's stock price and lower the best's, reducing incentives to be the best. Or there is just fiduciary duty: Managers may want to do what's in their shareholders' best interests because that is what they are supposed to be doing. Even if the shareholders don't actively force them to." In fact, as I understand it, index investing is just an end-spectrum case of institutional investing in general, and "Posner and Weyl blame institutional investors for income inequality. Elhauge blames them for runaway executive pay, and for the rise in corporate profits unaccompanied by economic growth and investment." Runaway executive pay, for example, seems to be a consequence of interlocking executive roles: the manager of this company is a director of that, and vice-versa, resulting in a positive feedback loop. I am, and have been for a long time, a major index investor; a big chunk of my portfolio is in various indexes. But it's already the case that a good way to get an extra boost is to buy the shares of a company just before it enters the S&P500. If the indices are having effects in the other direction, there may be problems in store. How about this for a universal law? Nothing in economics is an unbalanced positive.
- kspaans 11y ago
  Vanguard definitely uses its proxy votes: https://about.vanguard.com/vanguard-proxy-voting/ https://about.vanguard.com/vanguard-proxy-voting/

by obblekk 11y ago

praptak 11y ago

"Everyone ends off worse" - by a strange definition of everyone that leaves consumers out of the equation.

obblekk 11y ago
Well, consumers shouldn't be much worse off, otherwise it creates an arbitrage opportunity. Although Pepsi and Coke may be indexed, they aren't the same entity allowing investors to just own one. If there's some action that Pepsi could take that would massively reallocate the pie in it's favor (by winning over consumer for instance), then investors ought to start massing to it and becoming more activist. This would come at the expense of the index of course. So really as long as there's easy 'severability' of the companies in the index, they shouldn't be overtly monopolistic. But I agree in industries with high capital requirements (energy, biotech, etc.) it may be impossible to separate out the companies and then they would be de facto merged. This really is an interesting idea because a solution seems hard to find. Outright banning indexing would be nearly impossible to enforce (large pension funds could reproduce the index at a slighter higher cost).
- theseatoms 11y ago
  > Well, consumers shouldn't be much worse off, otherwise it creates an arbitrage opportunity. Only if the industry has a low barrier to entry.
davidw 11y ago
Consumers would be better off avoiding both Coke and Pepsi, most likely, aside from a very occasional one. http://www.ncbi.nlm.nih.gov/pubmed/23488503 http://www.ncbi.nlm.nih.gov/pubmed/23488503
- eru 11y ago
  Perhaps. But at any given level of consumption of Coke + Pepsi, consumers would benefit from lower prices.

mcguire 11y ago

I agree with you, but the article is making a pretty strong argument that indexing discourages competition in a way that makes everyone worse off. "[Elhauge:] 'Fourth, if index funds alone would create a problem of anticompetitive horizontal shareholding in a concentrated market, and those index funds feel the benefits of diversification across all firms in that market exceed the benefits of influencing corporate governance, they could commit not to communicate with management or vote their shares.'" I believe that is the case now: index funds don't vote or attempt to influence management (at least I've never heard of it). Also, each individual fund is limited in the proportion of an individual company it can own, but that limit does not apply to the total sum of index funds. "If you think that institutional investors are causing managers to stop competing, there are more plausible mechanisms for that than voting. Just leaving managers alone, for instance, probably itself tends toward anti-competitiveness: If shareholders don't pester management, they will probably compete less hard, just because that is easier. 'Voting with their feet' is another: If shareholders invest indifferently in both the best and the fourth-best firm in an industry, that will keep up the fourth-best firm's stock price and lower the best's, reducing incentives to be the best. Or there is just fiduciary duty: Managers may want to do what's in their shareholders' best interests because that is what they are supposed to be doing. Even if the shareholders don't actively force them to." In fact, as I understand it, index investing is just an end-spectrum case of institutional investing in general, and "Posner and Weyl blame institutional investors for income inequality. Elhauge blames them for runaway executive pay, and for the rise in corporate profits unaccompanied by economic growth and investment." Runaway executive pay, for example, seems to be a consequence of interlocking executive roles: the manager of this company is a director of that, and vice-versa, resulting in a positive feedback loop. I am, and have been for a long time, a major index investor; a big chunk of my portfolio is in various indexes. But it's already the case that a good way to get an extra boost is to buy the shares of a company just before it enters the S&P500. If the indices are having effects in the other direction, there may be problems in store. How about this for a universal law? Nothing in economics is an unbalanced positive.

kspaans 11y ago
Vanguard definitely uses its proxy votes: https://about.vanguard.com/vanguard-proxy-voting/ https://about.vanguard.com/vanguard-proxy-voting/