I own index funds in both a retirement account and in an open account I have with Vanguard Funds. I like the idea that a mutual fund can have several hundred securities, instead of maybe a few dozen, in order to spread the risk and have at least a portion of my money invested in a hot sector.
For those who do not know, index funds are a mutual fund composed of stocks (or bonds) tied to a particular investment index, such as the S&P 500. Thus, an index fund linked to the S&P will have almost all, if not all, of the 500 stocks in its portfolio. A S&P index fund may differ from investment company to investment company in terms of the number of shares of a specific corporation held, but they will all possess some share of that firm.
Frank Partnoy, a law professor at the University of San Diego, wrote an interesting piece in the September 2017 edition of The Atlantic magazine entitled, “Are Index Funds Evil?” He does not actually conclude that they are evil, but that the common ownership of a company’s stock by multiple investment companies could lead to anti-competitive results. He cites a report made in 2014 by a trio of economics consultants suggesting common ownership of stocks in the airline industry resulted in higher ticket prices. He added that common ownership existence could lead to a decrease in competition and innovation. He further added that this situation would have its greatest impact in industries dominated by a few companies, such as airlines.
Partnoy also mentioned that these funds, like the BlackRock Group, often ally with activist shareholders in company proxy wars, like the one mentioned in my previous post of Nelson Peltz against Proctor and Gamble.
I don’t believe investment companies with index funds do any actual collusion among themselves to keep a company or industry’s prices high. There may be unintended consequences, though, which warrants further research in this area. What concerns me is the influence of these investment companies in these proxy wars. Institutional investors hold a lot more money in company stocks versus individual investors than they did fifty years ago. Their votes are lobbied for, and there may be communication (and collusion) between fund groups in terms of getting over 50% for a proposal. In such proxy wars, not only customers could be affected, but even more so the employees. This situation may warrant more strict monitoring than the price situation.