Index Funds Outlawed?

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"Four decades ago, a financial research firm, Leuthold Group, distributed a poster to clients on Wall Street. "Help Stamp Out Index Funds," it declared, over an image of Uncle Sam. "INDEX FUNDS ARE UNAMERICAN!" Employees of the firm later said it was a joke. Last week, Sanford C. Bernstein & Co. argued that index funds interfere with the most productive allocation of capital. The firm warned that passive investing is "worse than Marxism."

"It's still easy to criticize index funds. It's just harder to laugh at them."

https://www.bloomberg.com/news/articles/2016-08-31/the-index-fund-turns-40-and-gets-its-revenge

Can anyone see index funds actually being outlawed? Maybe they are strangled in their cradle in the 1970's when (influenced by lobbying by managed funds) Congress outlaws index funds, using as a justification warnings like that of Stanford Calderwood: “Moving from a fully managed fund to an index fund is merely trading one set of risks for another,” Stanford Calderwood, a consultant, wrote in Financial Analysts Journal in 1977. He warned that index funds could be “self-defeating,” moving stock prices with their automatic buying and attracting “some MIT computer genius” who could “rip off the index funds” by trading against them."

Even today, the "Un-American" charge supposedly made jokingly by this cartoon is being made seriously: https://www.bloomberg.com/news/arti...e-investing-is-worse-for-society-than-marxism

"The rise of passive asset management threatens to fundamentally undermine the entire system of capitalism and market mechanisms that facilitate an increase in the general welfare, according to analysts at research and brokerage firm Sanford C. Bernstein & Co., LLC.

"In a note titled "The Silent Road to Serfdom: Why Passive Investing is Worse Than Marxism," a team led by Head of Global Quantitative and European Equity Strategy Inigo Fraser-Jenkins, says that politicians and regulators need to be cognizant of the social case for active management in the investment industry.

""A supposedly capitalist economy where the only investment is passive is worse than either a centrally planned economy or an economy with active market led capital management," they write.

"High fees and subpar returns, coupled with the creation of a plethora of relatively inexpensive exchange-traded funds that track major equity indexes have helped fuel a massive shift in asset flows away from active management in favor of passive. While policymakers are quick to praise the benefits of these low-cost options for retail investors, Bernstein argues that this is a short-sighted view that doesn't take into account the potential downsides involved with the increase in passively-managed assets.

"Fraser-Jenkins notes that the rise of indexing should theoretically entail that stocks tend to move in the same direction more often (though such a simple relationship isn't necessarily borne out by the data), and cites research indicating that "if the correlation of stocks increases then that impedes the efficient allocation of capital. That is, there isn't as big of a difference in capital expenditures on a sector by sector basis than what would be expected based on relative profit growth.

"The social function of active management, in a capitalist society, is that it seeks to direct capital to its most productive end, facilitating sustainable job creation and a rise in the aggregate standard of living. And rather than be guided by the Invisible Hand and profit motive, capital allocation under Marxism is conducted by an oh-so-visible hand aimed at producing use-values that satisfy each member of the society's needs. Seen through this lens, passive management is somewhat tantamount to a nihilistic approach to capital allocation.

"To adapt a line from a Coen brothers classic: Say what you will about the tenets of Marxism, Dude, at least it's a formal attempt to direct capital to achieve a desired end.

"The commonality between both active market management and the Marxist approach is that in both cases there are a set of agents trying – at least in principle – to optimize the flows of capital in the real economy," writes Fraser-Jenkins.

"Bernstein's team isn't asking for governments to bail out active managers, but merely advises that lawmakers and regulators "may wish to consider the broader benefits of a functioning active asset management industry to society as a whole so that when policy initiatives are undertaken they do not explicitly undermine active management."

"While the question of whether the rise of passive investing is an existential threat to capitalism remains an open one, Bernstein's team acknowledges one uncomfortable truth: it certainly looms as a major downside risk for the livelihoods of people who produce sell side equity research."
 
Index funds are the logical and intelligent way to invest. Of course if the big money bought off enough politicians early on, I guess they could have prevented their rise. Since when have our laws had to make sense for the little guy?

You would have funds that unofficially mirrored the index without being allowed to officially do it.
 
Interesting. With the idea floating around I'd expect that someone is eventually going to try it and be successful elsewhere, unless the legislation involved was written incredibly broadly it could well have the effect of pushing the market offshore from the US. Shades of German bunds and LIFFE in the 1990s. If they start making serious profits then it could become a fight between governmental inertia/those opposed to the idea of index funds on principle and people that want to try and make some money from them.
 

RousseauX

Donor
Interesting. With the idea floating around I'd expect that someone is eventually going to try it and be successful elsewhere, unless the legislation involved was written incredibly broadly it could well have the effect of pushing the market offshore from the US. Shades of German bunds and LIFFE in the 1990s. If they start making serious profits then it could become a fight between governmental inertia/those opposed to the idea of index funds on principle and people that want to try and make some money from them.
yeah the problem is that there's nothing preventing a canadian or british bank from just composing the dji index fund and nothing stoping american from buying them directly or indirectly
 
Yeah the problem is that there's nothing preventing a Canadian or British bank from just composing the DJI index fund and nothing stoping Americans from buying them directly or indirectly.
Well as I said it depends on how broadly they might write the law. If they just ban American firms from creating and running them then as you say foreign firms can just step in; if they also ban people from doing business with them then that blocks the brokers needed to operate so you'd have funds based on foreign market's indexes that Americans can invest in; if they also ban investing in them then you'd have index funds based on foreign markets but no American involvement. All it takes is a line in the law banning the 'creation, administration, servicing, or investing in' of indexes, that's the extreme version though.
 
Well as I said it depends on how broadly they might write the law. If they just ban American firms from creating and running them then as you say foreign firms can just step in; if they also ban people from doing business with them then that blocks the brokers needed to operate so you'd have funds based on foreign market's indexes that Americans can invest in; if they also ban investing in them then you'd have index funds based on foreign markets but no American involvement. All it takes is a line in the law banning the 'creation, administration, servicing, or investing in' of indexes, that's the extreme version though.

It would certainly feel odd for the extreme version to survive the deregulation frenzy of the 80’s and 90’s.
 
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