The Benefits And Risks Of Passive Investments

This is generally seen as a clear sign of discontent with management, giving management teams an incentive to prevent large shareholders from voting against their proposals. Management teams may also want to maintain a good relationship with their passive blockers, because their voices are particularly important during passive investments important moments such as power battles or takeover bids. Because they are block holders, the voting rights associated with their capital investments also serve as a lever for private obligations. The first signs of a fundamental change in the organization of corporate property emerged at the end of the 20th century.

The performance of a passive fund should reflect the index it follows, which means that the fund will share both the ups and downs of the index. There are many things in life that are effortlessly simple, yet we tend to complicate them. The story of passive investments and passive funds seems to have fallen into that trap.

BlackRock is the largest of the Big Three and represents the largest asset manager in the world. Note 23 BlackRock is a publicly traded company and is therefore under pressure to maximize profits for its shareholders. Vanguard, with $ 3.6 trillion in assets under management in mid-2016, is currently the fastest growing asset manager for the Big Three. In 2015, the group had an inflow of $ 236 billion, the largest annual cash flow to an asset manager of all time. Note 24 The main reason for Vanguard’s high growth is that it has the lowest rate structure in the entire asset management sector. Vanguard is the mutual property of its individual funds and therefore ultimately of investors in these funds.

Lower costs: passively managed investment products such as ETF, indexed funds, etc. they usually have lower spending rates compared to actively managed funds. This is because the investment team plays an almost insignificant role in the area of stock selection and investment time determination, as it is only necessary to monitor changes in the composition of benchmark indices. As a result, fund management and transaction costs are minimal, resulting in lower costs for investors. When we talk about the power of large asset managers, we are concerned about their impact on business control and as such their ability to influence corporate decision-making results.

When passive indexed funds become the main building blocks for active investments, we are facing a fundamental reorganization of contemporary corporate governance. After all, active investors who trade in passive components no longer have access to voting rights. And the Big Three collect voting rights without much concern for short-term considerations. Moreover, their interests are not limited to the well-being of a particular company.

Note 28 According to PwC, the assets invested in ETF are expected to double until 2020. Note 29 These forecasts make it imperative that we study the various sources of potential shareholder power of these large and growing passive asset management companies, especially the three major ones. While Big Three have in common that they are managers of passive assets, they are very different in their own corporate governance structures.

Despite this great potential power, the actively managed mutual funds tried not to influence the decision-making of companies at the time. First, it notes that homeowners who hold more than 10 percent of the voting rights are considered “experts”, which significantly limits their business opportunities. Second, actively managed mutual funds face potential conflicts of interest because the companies they invest in are often their customers. Particularly eminent is where mutual funds are major providers of the management of occupational pension funds. Note 13 Shareholder activism, and more generally, is always expensive and costs are borne only by the activist, while all shareholders benefit from the benefits.