The Passive Investor Problem
11th April 2024
If an investor bets big on Apple, that investor will have a good reason to carefully monitor Apple’s performance, carefully consider how to vote in shareholder elections, and serve as a watchdog on management because of their investments. With index funds, every investor can end up so diversified the performance of each company matters little to investors. It also means that a few investment companies can end up controlling a large or sometimes majority share of every major company. In 2019, the Harvard Business Review pointed out that “either Blackrock, Vanguard, or State Street is the largest shareholder in 88% of S&P 500 companies.”
This common ownership discourages competition.
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It also means that ideological crusades can be driven by a few investment companies. It’s hard to imagine small firms going all in on DEI or ESG investments. What small family company wants to abandon hiring the best job candidates in the name of diversity or adopt unproven “green” practices in the name of sustainability?
But if a few investment managers become passionate about such trendy left-wing ideas they can rapidly disseminate through the market.