Neil Collins’ Notebook – Index funds eat the world…

While we have been agonising at the power of the social media companies to dictate the terms on which we live, in another part of the economic jungle a pair of big beasts is threatening the whole basis of market capitalism. If that sounds melodramatic, consider the financial firepower of Blackrock and Vanguard, purveyors of index funds to the masses.

Including the also-ran State Street, those masses have entrusted an almost unimaginable $19tn to these investment houses, or about a tenth of the market value of the world’s listed securities. The entire UK stock market, for example, is worth less than $2tn. The attractions to the owners of the capital are obvious. Their money is invested in shares (or whatever class they choose) but they are saved the bother of either choosing which ones, or of paying someone else to pick stocks for them.

The investment process, tracking a chosen index, is simple to understand and to operate, so charges are much lower than with a managed fund. Besides, the traditional fund management industry is essentially self-serving, where the amount of capital that can be gathered is much more important for managers’ rewards than how good they are at investing. Even poorly-performing managers can keep drawing fees for years.

The managers at Blackrock and Vanguard have still less interest in how their funds perform than does your average fund manager. They are not even trying to do well. If a stock goes into an index one day, and drops out at a lower price a few months later (as Homeserve did for the FTSE100) that is not their problem. They are doing what they promised, and it is hardly their fault if you’ve picked the wrong index to track.

But success in attracting such vast sums has brought its own problems. As the biggest shareholders in many of the west’s leading companies, there’s the awkward question of exercising the votes attached to the shares. Both behemoths pay lip service to the ESG crowd, saying how shocked they are at the prospect of bad behaviour at the companies whose shares they hold. They are even gumming the oil majors (but not too hard) to keep the green lobby at bay.

Yet this is not really what they want to do, any more than to become the arbiters in takeover contests. They may be the technical owners, but the companies’ behaviour makes no difference to their business. Besides, they may lack the analysts to make a better decision in a bid battle than even, say, a financial journalist. The trackers are not much interested in voting their shares, anyway. They are the principal suppliers of ammunition to the short sellers who borrow stock (with its votes) to cause disruption.

Bloomberg’s Matt Levine has also speculated that if Blackrock were to own 10 per cent of every quoted airline (for example) that provides a powerful incentive to discourage the managements of the airlines from cutting prices or margins. There is no evidence that this has happened, but it’s clearly an anti-competitive possibility.

Finally, these funds increase the distance between the operating businesses and the beneficial owners of the shares. Even without the trackers, today’s version of capitalism is effectively played out between two sets of hired guns – corporate executives and fund managers. Rather than picking companies, investors pick managers. With a tracker they are effectively picking the managers’ managers. The FT lists half a page of share prices, and over two pages of investment funds.

This cannot be healthy for a thriving market in securities, any more than the rise of a dominant cabal of social media businesses has improved government and communications generally. Both problems look insuperable today, but too much power in too few unelected hands is not a recipe for prosperity and harmony. Another problem to add to Sleepy Joe’s list.

A vehicle for subsidies

You have not heard of Stellantis. You may not have heard of its boss, Carlos Tavares. You have heard of Fiat, Chrysler and Peugeot, which formally merged last weekend to become Stellantis, a meaningless name which perhaps betrays how little each brand is worth. The new company also employs 1,100 making the Vauxhall Astra at Ellesmere Port, but not for the first time, the shadow of the axe is over the plant.

Mr Tavares has no complaints about the highly productive workforce. He is mighty exercised by the UK government’s Gadarene dash to go green: “If you change, brutally, the rules and if you restrict the rules for business then there is at one point in time a problem, the more that we put stringent objectives on the automotive industry the more you get close to that limit.”

The brutal rule-change is, of course, the casual way the Prime Minister brought forward the ban on the sale of new non-electric cars to 2030. Mr Tavares, atop his empire of 200,000 jobs, might feel that is the last straw for the little non-EU outlier on the Wirral. Unless, of course, there’s a little help from the taxpayer to go electric.

The taxpayer might wonder where the electric subsidies stop. The bribe for company cars is little short of scandalous. A higher-rate taxpayer driving a company BMW 3-series will pay a benefit-in-kind tax of around £13,700 over three years. If instead she opts for a Nissan Leaf, the bill will be just £423, while the company can immediately write off the whole cost of the car against corporation tax.

Electric cars attract a £3,000 grant, pay zero road tax, escape parking charges and miraculously do not cause congestion, thus escaping London’s congestion charge. But we need even more subsidy, pleads RAC, the motoring lobby group. Please exempt electric cars from VAT, since the buyers would like to pay less, and the existing rich array of bribes is not enough to overcome our range anxiety. The solution is obvious: billions more in subsidies to build charging points. What are we waiting for!