This rather misses the point that what looks like a single mutual fund from the outside, from the inside it's the pension funds and other savings of tens of millions of ordinary people. Take Vanguard or Fidelity for example, they "control" a vast amount of money, but all they do with it is track indices on behalf of their retail customers.
'Manage' is the right word; an individual with money in a mutual fund has control in the sense that he or she can withdraw the money at any time if they disagree with the fund manager's decision.
Incidentally Vanguard et al have no managers in that sense either - they just track the indices.
I don't think that's right. Only the specific funds (e.g. the Vanguard 500 Index Fund (VFINX)) that say they track the indices do that (and generally charge a lower 'management' fee). Most funds (e.g. the Vanguard Capital Value Fund (VCVLX)) try to beat the indices, charge higher fees and have a range of things they are allowed to buy. There's the control.
"Incidentally Vanguard et al have no managers in that sense either - they just track the indices."
From the wikipedia page (which lines up with my knowledge): Since its founding in 1975, Vanguard has grown to become the world’s largest pure no-load mutual fund company. While mostly known for its low-cost index funds, Vanguard also offers a variety of low-cost, actively managed mutual funds and a line of exchange-traded funds (originally branded as VIPERs.) Vanguard also provides brokerage services, variable and fixed annuities, educational account services, financial planning, asset management, and trust services.
By analogy, it may have been the desire of people to travel from London to New York which made transatlantic liners, worth investing in, but it wasn't the passengers that steered the Titanic into an iceberg.
The disturbing point about the concentration of capital management power into the hands of a few is that to some extent it distorts the market's price-discovery function. Portfolio managers routinely align themselves with corporate managers - not necessarily out of any ill-intent, but just because doing so has delivered relatively steady returns over time - and as a result shareholder motions at company meetings - on board membership, executive compensation, risk strategy and so forth - are usually marginalized. This is good from portfolio managers point of view as it reduces share price volatility and pushes corporate management towards maximising quarterly returns, but as we've seen in the last two years those goals may not align well with the interests of investors over the longer term, at all.
Activist investors have changed this to some extent, but generally they rely heavily on leveraging in partnership with private investment pools or proxies, and even then a majority of activist investors are focused on increasing growth and profitability rather than risk management, preserving the interest of stakeholders, reducing externalities or capital preservation. The political consequence of this is that even those who are heavily invested in the market via pension schemes and so forth are hostile towards it because they can not see how their interests are reflected by capital flows, and regard the invisible hand as something of an iron fist.
Of course, some of this is due to ignorance and short-termism on the part of retail investors and pensioners who actually support rent-seeking economic behavior but simply don't see the big picture. A more serious issue, though - returning to my titanic analogy - is that the smaller the pool of portfolio managers, the greater the risk of disaster when herding or flocking behavior affects financial vectors with very large displacement.
> Take Vanguard or Fidelity for example, they "control" a vast amount of money, but all they do with it is track indices on behalf of their retail customers.
Control or power doesn't disappear, any more than mass-energy does - if Vanguard or Fidelity aren't controlling the billions in index funds, then who is?
The answer should be obvious: whomever decides who to include in an index. This is part of the reason public companies are so eager to be listed in the Dow or Nasdaq or S&P 500; they know that listing guarantees demand from the many index trackers etc.
> Control or power doesn't disappear, any more than mass-energy does - if Vanguard or Fidelity aren't controlling the billions in index funds, then who is?
Mutual fund investors no more affect the decision of the fund managers - and certainly not the indices' management - than does a random voter in even a swing state.
The fact that a single entity acts on behalf of tens of millions of ordinary people does not detract from the fact that it is a single entity that can exert that kind of influence. If that single entity abuses that power, then smaller entities loose money and the (extra) earnings largely end up in the pockets of the entity itself.
Interesting how so much money/power/responsibility is diluted and reconcentrated over and over in mutual funds, pensions, insurance companies, governments, etc. -- much like those subprime mortgage tranches. And we call this capitalism?!
Everyone is passing the buck... what's the connection between your investment and a productive enterprise somewhere? A long chain of financial games. Decisions are based on statistics and third-hand information, not on the merits of the end investment. Result: a crapload of bad investments and an unstable economy.
[Edit:] "Capitalism" gets blamed for this mess caused by the dilution of responsibility, which sounds pretty socialistic to me. You might call it "emergent socialism".
The connection between my investment and productive enterprise is very simple. Vanguard (the people who manage my money) transfer my investment to an enterprise they believe is productive but undervalued.
a single entity that can exert that kind of influence
In the US such an entity has a legal obligation to act in the best interests of his clients, and can be held liable for failing to act properly. Bernie Madoff is a prime example.
Regrettably, The Authorities often look the other way. Ken Lewis decided (well, was pushed) to go ahead and buy Merrill Lynch even though he knew he was screwing his Bank Of America shareholders. Still, it was a violation of the law and he should have been prosecuted. So while it's wrong to screw clients for personal benefit, evidently it's not wrong to screw clients for the government's benefit. (I don't know what that's called, but it's not "capitalism".)
He was "pushed" ( http://www.washingtonpost.com/wp-dyn/content/article/2009/04... ) by the US government, the same one that upholds the law that he has now violated. Damned if he did (prosecuted for violating the law), damned if he didn't (forcibly removed from his company by the US Government).
As an academic field, economics is completely underperforming. It's no suprise interesting research comes from other areas, such as physics in this case.
The results raise questions of where and when a company could choose to exert this influence, but Glattfelder and Battiston are reluctant to speculate.
"In this kind of science, complex systems, you're not aiming at making predictions [like] ... where the tennis ball will be at given place in given time," Battiston said.
It's nice to see that physicists are able to recognise the limits of knowledge when it comes to complex systems. You probably wouldn't hear a macroeconomist / econometrician say that, they would typically weigh in with some kind of prediction based on a dubious, self-referential model.
In fairness to economics, it's one of the most politicized fields. Back when hard sciences were a threat to some religious dogma, there was lots of trouble even doing astronomy. Economics is up against something a little similar to that right now.
Agreed. It took way too long for economists to integrate cognitive bias and social effects on rational decision making. Further, they have traditionally not integrated tools from analyzing networks, common in complex systems analysis.
Economics should basically rebrand itself as a subfield of complex systems analysis.
I studied Econ for a long time and came away rather frustrated with the limited toolset. Statistics, Computer Science, Math and Physics have better tools available.
Interestingly enough, this is true of basically every industry: our food production is controlled by a select few (who own farms), our car production is controlled by a select few (the car companies), our computers are controlled by a select few, etc.
If the list is so small then list them all instead of pointing to the 'big fish.'
This gives rise to the very real concern that the automated 'systems' that inform and execute on behalf of the 'few' may in fact wield too much control over the decision making process.
