Jack Bogle, the founder of Vanguard and father of the first retail index mutual fund, is worried that his invention is on the brink of becoming too powerful.
Specifically Bogle is concerned about the concentration of voting power in the hands of just a few index fund issuers.
In a guest column for the Wall Street Journal on Thursday, he argued that the index fund could become ‘too successful for its own good.’
‘It seems only a matter of time until index mutual funds cross the 50% mark [of corporate share ownership],’ Bogle wrote. ‘If that were to happen, the “Big Three” [Vanguard, BlackRock and State Street Global Advisors] might own 30% or more of the US stock market— effective control. I do not believe that such concentration would serve the national interest.’
Bogle suggested several solutions to the problem, such as limiting the voting power of shares held by index managers and requiring index funds to maintain an independent supervisory board to make corporate governance decisions, all fall short. Limiting voting rights would ‘absurd[ly]’ transfer voting rights from long-term stockholders to short-term investors, he argued, while creating a supervisory board might not be additive.
‘He kind of raises a concern without really offering what he thinks might be a viable solution or way of dealing with that concern,’ said Jeff DeMaso, the director of research for $5 billion RIA Adviser Investments and co-editor of the Independent Adviser for Vanguard Investors newsletter.
‘In a bit of a way, it feels like Jack is saying: “Hey, we brought out the index fund and made it the success that it is, but now the next generation is going to have to figure out some of the unintended consequences of the success of the index fund industry.”’
Bogle noted that the tremendous scale enjoyed by Vanguard — which manages $5.3 trillion in assets alone — and its peers, along with the industry wide trend towards fee compression, makes the hurdles for potential competition too high. The best possible outcome right now, he wrote, would be for the largest index fund issuers to adopt a fiduciary duty of their own, similar to the standard for RIAs.
‘While I believe that such a fiduciary duty is implicit today, making it explicit, with appropriate penalties for violations, would be a constructive step,’ Bogle wrote.
DeMaso concurred that a ‘fiduciary rule’ for the largest asset managers, coupled with better disclosure of their voting records, may be the best option on the table right now.
‘There’s a high level of concentration in the index industry, so the check on it would be if a company — say, Vanguard — starts being very transparent and making it easy to access how they’re voting and shareholders don’t like how they’re voting, but they prefer how Fidelity or BlackRock does, they then vote with their dollars by moving from one index provider to another,’ DeMaso said. ‘That would be some way to try and encourage better proxy voting and corporate governance behavior.’