Vanguard's Plan for World Domination

[ether]

Just had a thought: What if the reason Vanguard keeps fees so low is that the more capital it attracts to its mutual funds and etf, the more power they will have in setting market price and voting power in the largest corporation in the world!

Think about it, when you buy an etf or mutual fund, you are signing away your right to vote (the fundamental difference between debt and equity) for the right to be "diversified". Sure maybe your .0001% voting power in Apple doesn't mean much, but Vanguard has successfully convinced millions of small time investors into handing over their voting rights to them, creating a formidable force.

Now Vanguard (and other major mutual fund companies) each have ~7% stake in every major corporation in the S&P 500 and probably get to appoint a board member to each corporation!

[jacob]

Question one ... how do index funds vote their shares? Do they follow management's recommendations? Do they make discretionary votes? Or do they abstain?

[Chris]

With index funds being passive, I always assumed that they were "passive" on voting as well; they just stick with the board recommendations. I would expect managed funds are more opinionated.

I haven't done any deep research though. Funds are required to disclose their votes. The N-PX form for VTSAX is about 60MB, so you'd want to write a script to parse it to get your answer.

The information could be interesting. The 8-K filings have the vote totals, the N-PX has fund votes, and if we assume people filing Form 5 (insiders) vote with the board recommendations, simple subtraction would tell us if anyone else is voting at all. We'd also see if there's divergence between how the funds vote and how the individual holders vote.

[JL13]

C'mon guys, this is the first thing that comes up on Google:

https://about.vanguard.com/vanguard-proxy-voting/

I fail to see how Vanguard could vote in their own self-interest that would be different for the Vanguard investor? Vanguard is not the beneficial owner of the shares, and if they put their own board member on there who did a better job, then the fundholders would benefit, no?

Are you guys seeing some incentive for Vanguard to load the board with idiots and run the company into the ground? How would that benefit Vanguard?

[ether]

I'm not saying they want to run the company into the ground. Quite the opposite! There governance style can be read Here. The gist is no poison pills, board of directors much be independent of management, and one share equals one vote. Upon further research, this report shows Vanguard is mostly votes in favor of management 85% of the time and only votes against specific board members and capping executive pay. Not world domination, but an interesting thought exercise.

[eudaimonia]

I think the bigger issue is more of a second order effect that their success has created. The rise and current dominance of their fund has contributed to the further dumbing down of the average investor (just buy and hold baby), and in my view this presents a very dangerous possibility that the next market crash will have even more risk as the herd is stupider and even more correlated in their holdings than they probably realize.

[JL13]

@eudaimonia

Yeah it's interesting to think about conceptually. Since most money gets invested in the largest market cap stocks, and market cap is determined by the auction format, then the price becomes self-referential. what happens when vanguard's market ownership is so high that they are primary buyer and seller? If they are the entire market, do they even need to sell anything, or just change the owner's name internally?

[bryan]

So did everyone submit their proxy vote in the last month or so?

Matt Levine occasionally touches on this topic in his "Money Matters" column at Bloomberg. Fairly interesting, though the trend of private capital markets seems to me the bigger worry. Will Vanguard create a venture capital fund (to get exposure to private markets)?

[classical_Liberal]

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[bryan]

I'm certainly not an expert either, but it seems to me that it could be structured/shelled in a specific way to allow it to be owned by non-accredited persons, i.e. indirectly. You can have public companies owning at least part of private companies.

Regarding "interest" or "providing venture capital," I would say it's also talked about in Levine's column a good deal: basically the trend/concern is bigger private markets, less bigger public markets. Indexing is about owning the market, usually. So this wouldn't be about investing in startups, but rather just owning some private companies in the market. Of course, to get shares in private companies, you need to get to them when they really need capital, which is often early. Or buy the proxies of that market like banking/finance, real estate, related commodities, inter-linked companies, or public companies that own at least part of the private companies.

There's a lot of spare capital in the system right now and water flows the path of least resistance.

I'm not sure about bond markets in terms of public vs. private.

[jacob]

I'm certainly not an expert either, but it seems to me that it could be structured/shelled in a specific way to allow it to be owned by non-accredited persons, i.e. indirectly. You can have public companies owning at least part of private companies.

http://www.investopedia.com/terms/b/bdc.asp

MAIN is one of the more/most famous.

[classical_Liberal]

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