Index fund managers are too big for confort
Investors such as BlackRock cannot keep quiet and hope that no one will notice them
John Gapper
Think of an industry in which three big companies have used technology and economies of scale to become oligopolies and wield power over other enterprises. It hails not from Silicon Valley but the US east coast.
The industry in question is passive investment management, in which computers take the role of human stock pickers and money is channelled into index and exchange traded funds. The Big Three of the US industry — BlackRock, Vanguard and State Street — have gained such size and efficiency that they control 80 per cent of the money invested in US index funds.
Even Jack Bogle, founder of Vanguard and pioneer of the modern US index fund industry, is alarmed by their success. He has warned that, “if historical trends continue, a handful of giant institutional investors will one day hold voting control of virtually every large US corporation”.
That is a scary prospect for the future relationship between companies and their investors. Chief executives such as Paul Polman, the departing head of Unilever, sigh at the short-termism of some shareholders and activists. Would life be better if they reported to huge robots?
It might become quieter. Investors have traditionally expressed their displeasure with companies by selling shares, or by kicking up a fuss through public or private criticisms. The first tactic is barred to index funds: they have to hang on to stock in any company in an index, no matter how badly it is run. The weighting is set by a formula, not by individual discretion.
Passive investors also have less incentive than activists to speak up and persuade a company to change strategy, since no single investment has much effect on their performance. Leo Strine, supreme court chief justice in Delaware, the state in which many US companies are incorporated, has described index funds as “the least active in exercising voice and judgment”.
Companies should really want index fund companies not to remain silent, but to speak up. The worst of all worlds would be a shareholder base dominated by passive investors who are also passive owners, where most noise is made by a few activists who demand quick fixes. Index funds are naturally the most long term in outlook because they have no other choice.
The Big Three have realised they cannot keep quiet and hope that no one will notice them. Larry Fink, chief executive of BlackRock, has taken to publishing an annual letter to chief executives, which is a clue to where power lies. In this year’s missive, he promised: “We must be active, engaged agents on behalf of the clients invested with BlackRock.” That involves hiring more overseers — BlackRock intends to double its “investment stewardship” staff in the next three years — and arranging more conversations with chief executives. It voted at 15,000 investor meetings on 130,000 proposals last year, while Vanguard “engaged” with 720 portfolio companies representing $1.6tn of its assets under management.
As with investing, the giants are nothing if not efficient. They have their own governance guidelines and they do a lot of talking behind the scenes, following Theodore Roosevelt’s motto, “Speak softly and carry a big stick”. As one Dutch study suggested, they “exert structural power . . . in a way that is hidden from public view”.
This gets results. A study of US companies held by passive mutual funds found that they performed better than their peers thanks to stricter governance, such as having more independent directors and fewer takeover defences. The fund groups are good at curbing misbehaviour.
But their size and strength lead to two problems. First, they operate at such a scale that they tend to take a common approach to all companies. This is effective in imposing minimum standards in matters such as executive pay, but it does not amount to engaging deeply with corporate strategy in the same way as activist investors.
Companies could be left ticking boxes for passive investors, while still being exposed to intense, targeted pressure from activists who have more time. Mr Fink insists that talking consistently to long-term shareholders such as BlackRock will help companies not to be picked on by those with “the shortest and narrowest of objectives”, but the jury is still out on that.
Second, so few investors holding so much power would be worrying even if they were paragons. I sympathise with Vanguard’s decision to shine its spotlight on US makers of guns and opioids, but what happens if the giants team up against an innocent industry? It puts a premium on their judgment.
Antitrust scholars worry about collusion — institutions with stakes in different companies in an industry encouraging them not to compete hard with each other (one study found that US airline prices are higher as a result). The evidence is mixed but, as the fund groups expand, their capacity to exert invisible influence over the companies in which they hold stakes strengthens.
Like other consumer technologies, index funds have brought great benefits to ordinary investors. But Mr Bogle’s innovation, useful as it remains, may be working a little too well.
INDEX FUND MANAGERS ARE TOO BIG FOR COMFORT / THE FINANCIAL TIMES OP EDITORIAL
THE REVOLUTION EUROPE NEEDS / PROJECT SYNDICATE
The Revolution Europe Needs
The "Yellow Vest" protests in France over the past month have been compared to the historic revolt of May 1968, when students and workers almost brought the French economy to a halt in the name of political and cultural reform. But unlike its precursor, today's uprising is not so much an exercise in democracy as an attack against it.
Guy Verhofstadt
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STRASBOURG – The spontaneous street protests in Paris over the past month come almost exactly 50 years after the mass revolt of May 1968. But that is not to say the two events are comparable. Les événements de mai 1968 was an anarchist uprising by students and workers against the traditionalism and apparent authoritarianism of President Charles de Gaulle. Today’s “Yellow Vests,” by contrast, have eschewed intellectual and political debate, and quickly degenerated into a rioting mob.
What started as a decent, middle-class protest against a new tax on diesel fuel has been hijacked by professional thugs and extremists railing against migrants, the European Union, and French President Emmanuel Macron. “Paris is burning,” gloated Steve Bannon, US President Donald Trump’s populist former consigliere, at a recent appearance alongside Marine Le Pen of the far-right National Rally (formerly the National Front). According to Bannon, “The yellow vests … are exactly the same type of people who elected Donald Trump … and who voted for Brexit.”
Worse still, the extremist activism has already spread to neighboring Belgium and the Netherlands, which now have Yellow Vest movements of their own. And in Italy, Matteo Salvini, the xenophobic interior minister, has capitalized on the riots to launch a broadside against Macron’s policies. Never mind that Italy is in even more desperate need of a Macron-style reform agenda than France.
The fact that alt-right agitators are using the Yellow Vest movement as a platform to spew hate and lies should worry all Europeans. In one way or another, many of today’s populist parties and movements draw financial support from the Kremlin. There is a growing body of evidence to suggest that the United Kingdom’s 2016 Brexit referendum was influenced by “dark money” from Russia. And Russian trolls have continued to foment Islamophobic hatred across Western Europe.
The alt-right has been highly successful at exploiting people’s fears to undermine global solutions for global challenges such as migration and climate change. For those struggling to make ends meet, right-wing messaging about refugees and migrants taking jobs and destroying European culture can resonate powerfully. And for rural households facing slightly higher fuel taxes, it is convenient to believe that climate change is just a hoax propagated by political elites and “the media.”
A countermovement against such disinformation is long past due. The first step in stemming the populist, Euroskeptic tide is to tell the truth and point out the lies. But let us not be naive. Countering the alt-right threat to our societies will also require deep reform.
A common populist criticism of the EU is that it functions opaquely and often incomprehensibly. Yet, if anything, the EU tends to be rather weak in the face of global challenges. Contrary to populists’ claims of overreach, European institutions almost always do “too little, too late.” That must change, and radically so. We need to make the EU far more democratic, transparent, and effective – which is to say, more sovereign – than it is today.
This does not require us to reinvent the wheel. We need only return to the ideas of Europe’s founding fathers: Jean Monnet, Paul-Henri Spaak, Robert Schuman, Alcide de Gasperi, and others. These leaders had a clear vision of a simpler yet stronger Union, led not by a 28-member commission, but by a real government with 12 ministers. They would have allowed Europeans to vote directly for a parliament with full competencies and legislative authority, and without the system of unanimity that has allowed rogue member states such as Hungary to tie the entire bloc’s hands.
Above all, we must not equate liberal democracy with the status quo, which all but ensures slow, arduous decision-making. If the EU suddenly were to make collective decisions by simple majority, the problems confronting it would no longer seem intractable. Europe would finally be able to stand on its own and address its citizens’ concerns.
For example, with a European army serving as an autonomous pillar within NATO, the EU would no longer have to defer to the US on security decisions. With a single European digital market, European alternatives to Google, Facebook, Amazon, Samsung, and Huawei could finally emerge. And with a European border patrol and coast guard, Europeans would be far less reliant on Turkey, Russia, and others when it comes to managing migration flows. 2
Of course, controlling our borders does not mean closing ourselves off from the outside world. Europe will always need to engage with other powers. But it must do so from a position of strength.
If the EU can rediscover its democratic potential, the alt-right will no longer have grounds on which to launch attacks against international cooperation and multilateralism. In a more democratic Europe, citizens who took to the streets would do so not to scapegoat migrants and journalists, but to demand solutions for the real challenges we face.
Before it was co-opted, the yellow vest movement was based on a genuine concern about economic security. The lesson for all EU member states is that we must shore up our national social-security systems, while moving forward on EU-level reforms. With a full-fledged banking union, citizens’ savings would be secured, and taxpayers would not end up on the hook for private-sector profligacy. And with a complete monetary union and an autonomous joint budget, the eurozone would be far more resilient in the event of another financial crisis.
Until Europe gets serious about economic reforms, our economy will continue to underperform structurally vis-à-vis the rest of the world. Since 2010, the average annual growth rate in the euro area has been 1.3%, compared to 2.3% in the United States. This gap represents €1.2 trillion ($1.4 trillion) from 2010-2018, or approximately €500 billion lost in terms of tax revenue. For France alone, this amounts to €10 billion every year – the budgetary cost of what Macron recently proposed to meet the Yellow Vests’ original demands.
The uprising that Europe needs will not happen in the streets of Paris or Brussels, but within the EU’s paralyzed institutions. For more than five decades, power within Europe has been divided between conservatives and socialists who, collectively, have failed to address the challenges of the day.
It is time to leave the European talking shop behind us. The current era demands action. In the May 2019 European Parliament election, “Generation Europe” can break the old political order and take the revolution out of the streets and into the hallways of European democracy.
Guy Verhofstadt, a former Belgian prime minister, is President of the Alliance of Liberals and Democrats for Europe Group (ALDE) in the European Parliament and the author of Europe’s Last Chance: Why the European States Must Form a More Perfect Union.
ON U.S. INVOLVEMENT IN THE WAR IN YEMEN / GEOPOLITICAL FUTURES
On US Involvement in the War in Yemen
By Xander Snyder
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NOT ENOUGH LIFEBOATS: MARKETS FAR MORE DANGEROUS THAN GENERALLY BELIEVED / SEEKING ALPHA
Not Enough Lifeboats: Markets Far More Dangerous Than Generally Believed
by: Kevin Wilson
- That is the current market situation in a nutshell; I would argue that the current market risk is far greater than perceived by many.
- The volatility we're seeing on some measures has not been seen since 1936, right before a 50% drop.
- Household equity exposures are still high and equity mutual fund cash positions are at record lows, margin debt is unprecedented, and liquidity is low; all of this indicates extreme downside risk.
- Prudent investors may want to hold lots of cash, plus GLD or IAU, OTCRX, WHOSX, and TLT.





Bienvenida
Les doy cordialmente la bienvenida a este Blog informativo con artículos, análisis y comentarios de publicaciones especializadas y especialmente seleccionadas, principalmente sobre temas económicos, financieros y políticos de actualidad, que esperamos y deseamos, sean de su máximo interés, utilidad y conveniencia.
Pensamos que solo comprendiendo cabalmente el presente, es que podemos proyectarnos acertadamente hacia el futuro.
Gonzalo Raffo de Lavalle
Friedrich Nietzsche
Quien conoce su ignorancia revela la mas profunda sabiduría. Quien ignora su ignorancia vive en la mas profunda ilusión.
Lao Tse
“There are decades when nothing happens and there are weeks when decades happen.”
Vladimir Ilyich Lenin
You only find out who is swimming naked when the tide goes out.
Warren Buffett
No soy alguien que sabe, sino alguien que busca.
FOZ
Only Gold is money. Everything else is debt.
J.P. Morgan
Las grandes almas tienen voluntades; las débiles tan solo deseos.
Proverbio Chino
Quien no lo ha dado todo no ha dado nada.
Helenio Herrera
History repeats itself, first as tragedy, second as farce.
Karl Marx
If you know the other and know yourself, you need not fear the result of a hundred battles.
Sun Tzu
Paulo Coelho

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