Entrepreneur Warren Buffet, the nation’s second wealthiest man, (Click) was asked what advice he’d give to his wife about investing if he died before her. His reply was she should buy a low cost index fund, preferably from Vanguard. (Click) An Index fund buys and holds stocks that are listed on one of the major indexes– the Dow Jones Industrial Average, The Standard and Poor’s and NASDQ — and holds them for the duration, despite market fluctuations. Stocks listed on these three exchanges are rarely dropped because they are the most representative of their industries. Index funds which mirror the exchange stocks are called passive investments because no active manager is required to make daily buy-sell decisions. Passive index funds, for that reason, have lower fees than those actively traded.
Three of the major index funds are Vanguard, Black Rock and State Street. By law, they are required to be fully invested in the stocks of one of the 3 indexes and because the value of these funds are relatively stable compared to the overall market, they are the darlings of employers and unions who manage retirement funds. With the advent of IRA and 401k plans, however, money decisions are being shifted from employers, who used to provide pensions, to the worker who must now self-invest. Index fund managers are acutely aware of the shift and that they have a new set of customers to satisfy. That means these funds will monitor how decisions of the companies they hold will affect their clients. Plans to eliminate large numbers of workers, move a business abroad or to merge or buy another company will get careful scrutiny.
In the past, large, individual shareholders like Karl Icahn or Bill Ackman, held sway with these companies. As speculators, men like these were interested in policies set for short term horizons and that yielded quick profits. Now, index funds like Vanguard, Black Rock and State Street are flexing their larger muscles to focus companies on long term goals and financial stability. (“The Quiet Giants Take on the Activists,” by Ram Charan and Geoff Colvin, Fortune, June 15, 2015, pg. 95)
According to authors Ram Chan and Geoff Colvin, what we may be witnessing is a new form of capitalism. Already, the 3 biggest Index funds have joined a group of company directors, lawyers and advisors to form The Shareholder-Director Exchange where they will develop a protocol “ to help companies and institutions engage in new ways.” (Ibid, pg. 100) This new exchange may become the place where the interests of the workers and Wall Street finally merge.