What happens when index funds run Corporate America?
Hedge fund activist Bill Ackman posed that question recently in his fund’s annual letter to investors. It’s a really good one. No one knows what consequences the boom of passive investment funds will have for the corporations they own. It’s something my coauthors and I explore in a forthcoming research paper, and our conclusion goes against the prevailing wisdom.
After all, since 1998 the share of assets held by passive institutional investors — mutual funds designed to track stock indices like the S&P 500 rather than actively picking winners — has tripled. Last year clients poured an additional $414 billion into U.S.-based, lower-cost index funds offered by Vanguard, BlackRock, State Street, and others. At the same time, clients withdrew $207 billion overall from actively managed funds, according to the research firm Morningstar. The assets of BlackRock alone are now larger than the GDPs of all but two...
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