Vanguard founder Jack Bogle has raised concerns about concentration of index holdings among Vanguard, Blackrock and State Street Global while warning Fidelity Investment’s zero-fund fees will only compound the problem.
It is only a matter of time before index mutual funds represent 50% of the total stock market value up from 17% today, Bogle (pictured) wrote in an opinion piece for the Wall Street Journal.
“If that were to happen, the ‘Big Three’ might own 30% or more of the U.S. stock market—effective control. I do not believe that such concentration would serve the national interest,” he said.
Bogle was behind the first passive index fund, now known as the Vanguard 500 Index Fund, which launched in December 1975, the same year the fund house was founded. It only attracted $11.3m at launch, 95% short of target, but sparked an index fund industry now worth $6trn.
Fidelity’s zero fees don’t help
Race-to-the-bottom prices, alongside huge scale enjoyed by incumbents, create high barriers to entry, he said. Vanguard, Blackrock and State Street Global collectively account for 81% of index fund assets.
Bogle singled out a fourth player, Fidelity Investments, for driving out competition.
“If Fidelity’s 2018 offering of two zero-cost index funds has established a new ‘price point’ for index funds, the enthusiasm of additional firms to create new index funds will diminish even further.”
In October, Fidelity mutual funds managed to outsell Vanguard with its success attributed to its charging structure on the zero-fee funds, which have been described as a loss leader to attract retail investors who might then invest in other funds from their range.
Indexing reshapes corporate governance
Bogle said he agreed with a draft paper from Harvard Law School that stated indexing is at a tipping point where the voting power will be controlled by a small number of firms who can exercise “practical power over the majority of US public companies”.
He pointed to several viable solutions outlined by the paper’s author professor John C Coates. These included public disclosure on voting and engagement and fiduciary duty legislation focused on index funds.
However, he rubbished other suggestions, such as limiting voting power of shares held by index managers. This would transfer voting rights from long-term shareholders to “corporate stock renters” focused on short term returns.
