Are Index Funds Getting Too Powerful?

Are Index Funds Getting Too Powerful?

WBUR has an interview with John Coates, the John F. Cogan professor of law and economics and deputy dean of Harvard Law School. He was the former general counsel of the Securities and Exchange Commission and is the author of the book The Problem of Twelve: When a Few Financial Institutions Control Everything.

Mr. Coates explains how the Big Four index fund providers, Vanguard, State Street, Fidelity, and BlackRock control more than 20% of the voting power of the S&P 500 companies. This level of concentration in the hands of a handful of financial firms is unprecedented in American capitalism and raises serious concerns for economic dynamism. It is a good indication that index funds may be getting too powerful.

He also raises issues with the power of private equity, which is more opaque because there is much less disclosure of the holdings at these funds. Private equity giants include KKR, Apollo, Blackstone, and Carlisle, which combined control more than $2.7 trillion in assets.

Unfortunately, there is no easy fix that would reduce the level of concentration at the heart of American finance. The most likely path is that we will continue down the road of further consolidation and oligopoly until a crisis or severe stagnation triggers a new direction. The advantages that these giants of finance have in terms of economies of scale, control of the regulatory apparatus, and lobbying heft is too great. When that is combined with the automatic nature of passive investing it is unlikely that any legislation or new entrants into the market would reverse this powerful trend.

Read the interview here

 

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