SUMMARY - Trillions - Robin Wigglesworth

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Here is a summary of the key points about Harry Markowitz and his influence on the development of index funds:

  • In 1952, Harry Markowitz published his groundbreaking paper "Portfolio Selection" while a PhD student at the University of Chicago.

  • Markowitz formally introduced the concept of diversification and showed how to quantify and optimize the tradeoff between risk and return in constructing investment portfolios. This became known as modern portfolio theory.

  • His work showed that investors should care about the overall risk-return profile of their portfolio, not just individual assets. This supported passive approaches focused on broad diversification rather than stock picking.

  • Markowitz's ideas were extended by later economists like William Sharpe into the capital asset pricing model (CAPM) and efficient market hypothesis, which further supported the logic behind index funds.

  • By quantifying portfolio risk mathematically, Markowitz helped shift investment analysis away from qualitative judgment towards more data-driven approaches. This created an intellectual foundation for low-cost, rules-based index investing.

  • So while not directly involved in their development, Markowitz's pioneering work in portfolio theory was essential in laying the groundwork for the later emergence of index funds. He provided key mathematical and theoretical underpinnings.

    Here is a summary of the key points:

  • In the 1960s, academic theorists like Harry Markowitz, William Sharpe, and Eugene Fama developed new models challenging the effectiveness of traditional active stock picking.

  • The University of Chicago was a hub for this quant revolution, with pioneering empirical analysis of market data through the Center for Research in Security Prices (CRSP).

  • Markowitz showed diversification reduces portfolio risk, Sharpe introduced the capital asset pricing model, and Fama provided evidence for efficient markets theory - all undermining the case for active stock picking.

  • Their ideas were transmitted to practitioners through figures like John McQuown and Wells Fargo's Management Sciences team. McQuown recruited top academics to consult.

  • Wells Fargo worked to build the first index funds based on this academic theory, launching a fund in 1971. But legal issues forced abandonment of their mutual fund.

  • In 1973 Wells Fargo launched an index fund limited to institutions that tracked the S&P 500, in collaboration with Index Committee chairman Samsonite.

  • American National Bank and Batterymarch also launched early index funds in 1973-1974. But Vanguard's 1975 retail index fund truly brought passive investing to the masses.

    Here is a summary of the key points:

  • John Bogle founded Vanguard in 1974 after being ousted from Wellington Management. He launched it as a novel mutual company owned by its funds.

  • Bogle pioneered index investing, launching the first retail index fund in 1976. It was mocked as "Bogle's Folly" initially but proved successful over time.

  • Vanguard benefited from the 1980s-90s bull market and rise of 401(k)s. Its assets surged as it positioned itself as a low-cost provider, aided by Bogle's moral image.

  • Flagship funds like Vanguard 500 Index and Total Stock Market Index attracted huge inflows. Index funds gained popularity as investors realized their benefits over costly active management.

  • Vanguard's unique mutual structure allowed it to continually lower costs and return profits to shareholders as assets grew. By 2000, it had over 10% market share, becoming a dominant force in mutual funds.

  • Bogle cultivated Vanguard's reputation for integrity, transparency and championing small investors. His index crusade transformed the industry despite initial ridicule. Vanguard emerged as a model for low-cost index investing.

    Here is a summary of the key points:

  • In the 1990s, index funds grew to account for nearly half of Vanguard's assets under management, up from just 11% in 1991.

  • Vanguard's Total Stock Market Index Fund quickly became the company's largest fund as index funds gained popularity.

  • The rise of index funds at Vanguard was driven by John Bogle's vision of low-cost, passive investing for the average investor.

  • Bogle pioneered index funds in the 1970s with Vanguard's First Index Investment Trust.

  • By keeping costs low and avoiding active stock picking, Vanguard's index funds were able to outperform most actively managed mutual funds.

  • The 1990s saw a cultural shift as investors increasingly embraced the index fund approach over traditional active management.

  • Vanguard capitalized on this trend by expanding its index fund offerings into bonds, international stocks, and more specialized indexes.

  • The company's indexing success cemented its status as a leader in the fund industry and validated Bogle's long-held belief in the value of passive investing for the long term.

    Here is a summary of the key points:

  • In 1988, Larry Fink and Ralph Schlosstein founded Blackstone Financial Management (BFM) as part of Blackstone Group. BFM leveraged the founders' Wall Street connections to quickly grow to $23 billion assets under management within 6 years.

  • However, tension developed between BFM and Blackstone over equity dilution as BFM brought on more partners. In 1994, BFM partners bought out their share from Blackstone for $240 million.

  • BFM was renamed BlackRock and continued operating as an independent company. It went public in 1999 through an IPO that raised $240 million but was seen as disappointing at the time.

  • As a public company, BlackRock accelerated growth through acquisitions. Key purchases included State Street Research & Management in 2005 and Merrill Lynch Investment Managers in 2006.

  • The financial crisis of 2007-2008 provided opportunities for BlackRock as troubled banks and funds sold assets. In 2009, BlackRock made its largest deal - acquiring Barclays Global Investors for $13.5 billion.

  • The BGI deal transformed BlackRock into the world's largest asset manager with over $3 trillion under management. It also made BlackRock the leader in passive investing strategies through BGI's iShares ETF brand.

  • Under Larry Fink's leadership, BlackRock grew into a financial giant, evolving from a specialized bond manager into a full-service investment and risk management powerhouse.

    Here is a summary of the key points on index providers' growing influence:

  • The rise of passive investing has greatly increased the influence of major index providers like S&P, MSCI, and FTSE Russell, who design the indices that passive funds track.

  • Inclusion or exclusion from major indices can cause huge stock price swings and significant capital flows as passive funds must buy or sell shares.

  • Index providers make judgment calls on inclusion criteria, sector classifications, country classifications, and weightings that shape markets and influence corporate behavior.

  • The "Big Three" firms now control around 70% of the global index market. Index creation has become a highly profitable business.

  • Indices shape markets rather than just passively reflecting them, as trillions in assets track them. Index providers exert quiet but substantial power over markets and companies.

  • Their influence raises concerns about concentration of power, potential conflicts of interest, and subjectivity in supposedly passive investing. More transparency may be needed around index methodology.

  • But index providers argue their influence promotes better corporate governance and financial markets overall by setting standards. They claim indices have benefited investors enormously.

    Here is a summary of the key points regarding the concerns raised by Lucian Bebchuk and Scott Hirst about the growing concentration of power among the "Big Three" asset managers (BlackRock, Vanguard, State Street):

  • They predict that within 10 years, the Big Three will collectively constitute the largest shareholder in practically all major U.S. companies.

  • This level of concentrated power in just three firms raises concerns about lack of competition and diversity of viewpoints represented.

  • It may undermine managers' accountability to shareholders, as the Big Three may be reluctant to oppose entrenched managers.

  • Corporate leaders may end up beholden to the Big Three rather than serving all shareholders. This could stifle innovation and risk-taking.

  • The Big Three's business model based on offering low-cost index funds creates misaligned incentives when it comes to governance activism. Engagement is costly and index funds compete on cost.

  • Concentrated power may allow the Big Three to advance social or political agendas not shared by all fund investors. This could be seen as illegitimate.

In summary, the unprecedented concentration of equity ownership and shareholder voting power in just three index fund managers raises pressing concerns about corporate governance and accountability that merit serious consideration.

Here is a high-level summary of the key points about index funds and indexing covered in the book passages:

  • Origins of indexing - Pioneers like Louis Bachelier, Alfred Cowles, and Paul Samuelson laid the theoretical groundwork for index investing through concepts like random walk and market efficiency.

  • John Bogle and Vanguard - Bogle founded the first index mutual fund in 1976, pioneering low-cost, passive investing for the masses through vehicles like the Vanguard 500 Index Fund.

  • Quantitative investing - Firms like Wells Fargo and Dimensional Fund Advisors advanced indexing and "quant" techniques for portfolio management in the 1960s-1970s.

  • ETFs - Innovations like SPDRs and the American Stock Exchange allowed the launch of the first ETFs in the 1990s, making index investing more accessible.

  • Growth of indexing - Assets in index funds surged starting in the 1990s, shifting power from active stock-pickers to giant passive managers like Vanguard and BlackRock's iShares.

  • Impacts and concerns - Passive indexing transformed investing but also raised issues around corporate governance, market concentration, and effects on stock prices.

Let me know if you would like me to expand or modify this high-level summary. I'm happy to provide more detail on any specific aspects of the history of index funds and indexing.

Here is a summary of the key points from chapter 17:

  • Passive investing through index funds has become enormously popular, with over $2 trillion moving out of actively managed mutual funds to index funds since 2007.

  • Index funds tracking benchmarks like the S&P 500 have consistently outperformed the majority of actively managed funds over the long term.

  • Even famous investors like Warren Buffett have struggled to beat passive index funds in recent years.

  • Active managers argue they can outperform in bear markets by being nimble, but data shows most still underperform indices even in downturns.

  • The shift to passive investing accelerates after each market crash as investors lose faith in active managers' ability to outperform.

  • Over 10 year periods, only around 15% of active US stock fund managers have managed to outperform their benchmark index.

  • Passive investing may be less efficient in more exotic assets like emerging markets, but overall the data shows most active managers underperform indices over time after fees.

In summary, the popularity of passive index funds has skyrocketed as data shows active managers consistently underperform over the long run, accelerating after each downturn.

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