http://www.bloombergview.com/article...16/should-mutual-funds-be-illegal-
A couple of professors have proposed that mutual funds not be allowed to own share in more than one company in any one industry. They give the example of the airline industry, claiming that fare would be 3-11% cheaper if this was the law.
I see a lot of problems with this. Starting with the fact that academic eggheads are rarely right.
1. If fares were 3-11% cheaper on average, that would drive more consolidation and drive fares right back up (either thru bankruptcies or mergers).
2. If mutual funds could invest in only one airline, one airline (perhaps Southwest) would have unlimited access to capital while other would be capital starved and would not be able to expand.
Be aware of the law of unintended consequences.
Id like input from A.netters.
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RE: Should Mutual Funds Be Illegal?
I should also add that with 85% load factors, airlines have a strong degree of pricing power. In order to have lower fares you need more capacity. Laws limiting mutual fund ownership in no way increases capacity.
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- durangomac
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RE: Should Mutual Funds Be Illegal?
I agree limiting mutual fund ownership won't help anything, might force people away from them. As for how they will help/hurt airlines, I think it won't change much. I personally feel the airlines need to raise fares and bring down the load factor, during IROP's they have very little room to react and accommodate everyone.
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- deltaffindfw
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RE: Should Mutual Funds Be Illegal?
| Quoting MVAair (Thread starter): 2. If mutual funds could invest in only one airline, one airline (perhaps Southwest) would have unlimited access to capital while other would be capital starved and would not be able to expand. |
What capital? Mutual funds buy shares in the secondary market. The company gets zero dollars - regardless of who owns their shares. They only got the capital when they originally issued the shares.
That article is pure academia. In practice, why would every mutual fund want to be exactly the same with regards to diversification? Then we would only need two or three funds. Also, the government does not put much restrictions on what can be in a retirement plan offering. Yes, you need to have diversified funds, but you can also add anything else you want. I worked for Fidelity years ago, and our 401k had all 200+ funds in the lineup. If I wanted to buy a fund that focused 100% on oil and gas or transportation or gold, I was free to do so.
If Fidelity was only allowed to own one airline, why would that be more competitive? They are still going to push the company to do better than their peers - especially since they placed a bet with airline A when Vanguard placed a bet by owning airline B. That doesn't mean less revenue (lower fares) necessarily.
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- lancelot07
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RE: Should Mutual Funds Be Illegal?
| Quoting MVAair (Thread starter): |
Mutual funds usually are passive financial investors who do not influence operations, and there are so many mutual funds, it would not matter.
| Quoting durangomac (Reply 2): |
RE: Should Mutual Funds Be Illegal?
Yeah their argument makes no sense whatsoever. No owner pushes their managers to cut prices, regardless of common ownership or not. Totally absurd.
"If goods do not cross borders, soldiers will" - Frederic Bastiat
RE: Should Mutual Funds Be Illegal?
| Quoting lancelot07 (Reply 4): Mutual funds usually are passive financial investors who do not influence operations, and there are so many mutual funds, it would not matter. |
And then there is this
"If goods do not cross borders, soldiers will" - Frederic Bastiat
RE: Should Mutual Funds Be Illegal?
Wow. Slate totally jumped the shark on this one.
How is it even possible to say that ticket prices are 3-11% more expensive than they should be when airlines' profit margins are in that same range? Are they saying that airlines would not make a profit if mutual funds did not own their shares?
How is it even possible to say that ticket prices are 3-11% more expensive than they should be when airlines' profit margins are in that same range? Are they saying that airlines would not make a profit if mutual funds did not own their shares?
/// U N I T E D
RE: Should Mutual Funds Be Illegal?
This is absurd. Send these clowns to the scrap heap.
Why do Aerospace Engineering students have to turn things in on time?
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- WestJet747
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RE: Should Mutual Funds Be Illegal?
Their argument would be predicated on a firm's shares being held exclusively by an assortment of mutual funds, which we all know is not true. If they're blaming institutional investors for not pushing managers to drive down prices enough, then what are the independent investors doing?
One of the top comments on the Bloomberg article also makes an excellent observation: Passing the legislation the authors propose would put many people with a 401k into financial ruin. Too many people rely on pooled funds to make consistent, positive returns while remaining as hands-off as possible.
The entire notion is just silly.
That is what the professors are saying the "problem" is. They claim that mutual funds don't put enough pressure on airline management, which is why prices are "inflated".
One of the top comments on the Bloomberg article also makes an excellent observation: Passing the legislation the authors propose would put many people with a 401k into financial ruin. Too many people rely on pooled funds to make consistent, positive returns while remaining as hands-off as possible.
The entire notion is just silly.
| Quoting lancelot07 (Reply 4): Mutual funds usually are passive financial investors who do not influence operations, and there are so many mutual funds, it would not matter. |
That is what the professors are saying the "problem" is. They claim that mutual funds don't put enough pressure on airline management, which is why prices are "inflated".
Flying refined.
RE: Should Mutual Funds Be Illegal?
| Quoting MVAair (Thread starter): I see a lot of problems with this. Starting with the fact that academic eggheads are rarely right. |
When it comes to finance, academics are almost always incorrect (very often dangerously so). If they knew nearly as much about finance as they think they do, they would be working in the field and making millions of dollars a year.
| Quoting MVAair (Thread starter): Id like input from A.netters. |
This (their premise, not your thread starter) has got to be the most idiotic thing I have ever heard being spewed by a finance professor, and I have heard many idiotic things on that front. There are so many problems with them that I don't even know where to start.
| Quoting deltaffindfw (Reply 3): Mutual funds buy shares in the secondary market. |
Not true. Mutual funds buy shares in the primary market (directly from companies) as well, it is just that trading volumes there are a lot lower, but that is a supply issue (not enough companies offering primary shares) and not a demand issue. If you are a company and you need to raise capital in the public markets you absolutely need to go to mutual fund investors with your stories. Also, in the bond markets, where trading liquidity is fairly low, if you are an investor looking to get exposure to a certain name, buying bonds directly from the issuer is still the way to go.
Read this very carefully, I shall write this only once!
RE: Should Mutual Funds Be Illegal?
| Quoting Zone1 (Reply 7): Are they saying that airlines would not make a profit if mutual funds did not own their shares? |
No. What they are saying is that diversified investors do not push the companies they are invested in as hard to maximize their profits as shareholders who are not diversified. Their theory is that diversified investors look at an industry as a zero-sum game. Why push one company they're invested in harder if the gains come at the expense of another company they are invested in.
Since it isn't a zero-sum game for non-diversified investors, they have every incentive to encourage management to maximize profits as much as possible.
That is why they propose that mutual funds be allowed to invest in only one company per industry.
RE: Should Mutual Funds Be Illegal?
| Quoting Pyrex (Reply 10): When it comes to finance, academics are almost always incorrect (very often dangerously so). If they knew nearly as much about finance as they think they do, they would be working in the field and making millions of dollars a year. |
Not saying they may not often be wrong, but just had to point out that that statement is ridiculous. Believe it or not, not everyone is driven primarily by an urge to make money (often screwing other people over on the way). Some people love teaching, or love writing, understanding, learning for its own sake, etc.
Anyway, carry on...
All Glory to the Hypnotoad!
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- Dreadnought
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RE: Should Mutual Funds Be Illegal?
| Quoting MVAair (Thread starter): A couple of professors have proposed that mutual funds not be allowed to own share in more than one company in any one industry. They give the example of the airline industry, claiming that fare would be 3-11% cheaper if this was the law. |
Mutual funds are a key resource for the not-so-well-off to participate in the stock market with a reasonable level of risk. Shutting them down will just make worse the "Rich get richer, Poor get poorer" problem. But that's what liberal academics want to see anyway, so their conclusion is no surprise.
But I do agree that mutual funds tend to carry more than their fair share of influence in terms of shareholders' meetings. I think that the ability of mutual funds to proxy-vote for their customers should be severely limited, if not eliminated, and a mechanism found to allow the investors to vote directly. In this age of internet, this should be possible.
Democrats haven't been this angry since we took away their slaves.
RE: Should Mutual Funds Be Illegal?
| Quoting n229nw (Reply 12): Believe it or not, not everyone is driven primarily by an urge to make money |
No, some people are driven primarily by an urge for power. Those are the people to fear.
| Quoting n229nw (Reply 12): Some people love teaching, or love writing, understanding, learning for its own sake, etc. |
If they want to learn and understand how finance really works they should go work at a bank, not come up with ridiculous proposals like the one above.
Read this very carefully, I shall write this only once!
RE: Should Mutual Funds Be Illegal?
Mulling it over a bit more, this is a horrendously dangerous idea that could ruin many people's savings. Essentially, this would outlaw risk mitigation. Investors could no longer bet on a industry or the overall economy, only a handful of players. They would hang one bad product launch or poor management decision from losing huge amounts of money.
Why do Aerospace Engineering students have to turn things in on time?
RE: Should Mutual Funds Be Illegal?
| Quoting Dreadnought (Reply 13): Mutual funds are a key resource for the not-so-well-off to participate in the stock market with a reasonable level of risk. Shutting them down will just make worse the "Rich get richer, Poor get poorer" problem. But that's what liberal academics want to see anyway, so their conclusion is no surprise. |
Just scanning through these replies I get a feeling that a lot of people don't know what mutual funds are. Probably a lot of the same people who have 401k programs but don't think they are investing in the stock market when they pick mutual funds for it.
There really needs to be some better financial education out there. preferably starting in the early high school years.
OBAMA-WORST PRESIDENT EVER....Even SKOORB would be better.
RE: Should Mutual Funds Be Illegal?
| Quoting Dreadnought (Reply 13): But I do agree that mutual funds tend to carry more than their fair share of influence in terms of shareholders' meetings. I think that the ability of mutual funds to proxy-vote for their customers should be severely limited, if not eliminated, and a mechanism found to allow the investors to vote directly. In this age of internet, this should be possible. |
I have to admit, shockingly so that I agree with this part of your statement. They control everything, the common stockholder has no power what so ever.
It is better to die on your feet, than live on your knees.
RE: Should Mutual Funds Be Illegal?
| Quoting WarRI1 (Reply 17): They control everything, the common stockholder has no power what so ever. |
That's what mutual fund manager are for. You buy a mutual fund to have a professional manage your investments for you so that you don't have to bother. If you want more say in the matter, you buy your own individual stocks.
RE: Should Mutual Funds Be Illegal?
2
I may be incorrect, but I thought we, Dreadnaught, was talking about the individual stockholder not having any say about the management of the corporation what so ever because of the huge voting power of stock managers/mutual funds. You buy a million shares these days, and you have no more power than the guy with a thousand shares as far as voting for different issues concerning corporate governance by the Board etc.
| Quoting johns624 (Reply 18): That's what mutual fund manager are for. You buy a mutual fund to have a professional manage your investments for you so that you don't have to bother. If you want more say in the matter, you buy your own individual stocks. |
I may be incorrect, but I thought we, Dreadnaught, was talking about the individual stockholder not having any say about the management of the corporation what so ever because of the huge voting power of stock managers/mutual funds. You buy a million shares these days, and you have no more power than the guy with a thousand shares as far as voting for different issues concerning corporate governance by the Board etc.
It is better to die on your feet, than live on your knees.
RE: Should Mutual Funds Be Illegal?
| Quoting johns624 (Reply 18): That's what mutual fund manager are for. You buy a mutual fund to have a professional manage your investments for you so that you don't have to bother. If you want more say in the matter, you buy your own individual stocks. |
Ding! Ding! Ding! Winner!
| Quoting WarRI1 (Reply 19): we, Dreadnaught, was talking about the individual stockholder not having any say about the management of the corporation what so ever because of the huge voting power of stock managers/mutual funds. |
The vote should go to the manager, he is running the show.
OBAMA-WORST PRESIDENT EVER....Even SKOORB would be better.
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- Dreadnought
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RE: Should Mutual Funds Be Illegal?
| Quoting L-188 (Reply 20): Quoting johns624 (Reply 18): That's what mutual fund manager are for. You buy a mutual fund to have a professional manage your investments for you so that you don't have to bother. If you want more say in the matter, you buy your own individual stocks. Ding! Ding! Ding! Winner! |
Wrong. Mutual Funds are not "so you don't have to bother", at least not necessarily. Their primary purpose is for people who don't have enough investment funds to spread out in a properly diversified manner. In my opinion, what you are talking about is more of a Private Equity Firm, the purpose of which is not only to collect funds to invest, but also to play a role in the management of the companies they invest in. Mutual Funds at their beginning were much smaller and not generally able to pull so much weight, but they have evolved to a huge size that they are acting like Private Equity firms - but they don't carry the same risk. All the risk is on their investors, whereas Private Equity firms share at least part of the financial risks via their founding partners. When the Mutual Fund manager carries such low risk to itself, I don't think they should be allowed to have the same say in the target companies.
Democrats haven't been this angry since we took away their slaves.
RE: Should Mutual Funds Be Illegal?
| Quoting Pyrex (Reply 14): If they want to learn and understand how finance really works they should go work at a bank, not come up with ridiculous proposals like the one above. |
I personally know several finance professors fairly well. All of them worked either at I-Banks or hedge funds for several years before going back and getting their doctorates. The theory above is a stupid one, but it doesn't mean that all finance professors don't know about how financial markets really work. For example, without financial economics professors you wouldn't have the Black-Scholes model, and without that the options-trading boom would have been much-delayed or never happened.
RE: Should Mutual Funds Be Illegal?
| Quoting Dreadnought (Reply 21): Wrong. Mutual Funds are not "so you don't have to bother", at least not necessarily. Their primary purpose is for people who don't have enough investment funds to spread out in a properly diversified manner. In my opinion, what you are talking about is more of a Private Equity Firm, the purpose of which is not only to collect funds to invest, but also to play a role in the management of the companies they invest in. Mutual Funds at their beginning were much smaller and not generally able to pull so much weight, but they have evolved to a huge size that they are acting like Private Equity firms - but they don't carry the same risk. All the risk is on their investors, whereas Private Equity firms share at least part of the financial risks via their founding partners. When the Mutual Fund manager carries such low risk to itself, I don't think they should be allowed to have the same say in the target companies. |
I am getting worried, again I have to agree with you on this matter. I can personally attest to what you say. They will lose your money after they invested it for you, and they are not out a dime of theirs, nor do they really care. Like a Fund Manager once said to me after the Asian Crisis. Hey, we all have problems. My money was quickly moved to my wife's banks investment arm. I have have been with them ever since that happened.
It is better to die on your feet, than live on your knees.
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- DfwRevolution
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RE: Should Mutual Funds Be Illegal?
| Quoting Dreadnought (Reply 13): A mechanism found to allow the investors to vote directly. In this age of internet, this should be possible. |
It sounds like you are describing a service which already exists:
www.proxyvote.com
Edit: I re-read your post. It sounds like you are suggesting that mutual fund owners should be allowed to cast proxy votes for the individual holdings of the fund. While technically that could be done, there are major hurdles in practice. Take an average retirement account ($32,000) invested entirely in a common fund like VTSMX. You're single biggest holding is 8 shares of Apple, Inc. The fund contains 3,781 stocks in total, so the votes would rapidly become fractional. In practice, who - as individual investors - is going to exercise even a handful of those proxies?
The post about professional management of mutual funds is fundamentally correct. Whether you choose active mutual funds to try and "beat the market" (foolish to try) or a passive fund to track the market (foolish not to try), you are ultimately relying on a manager to make investment decisions on your behalf. Exercising an irrelevantly small proxy vote is just back seat driving, IMO. If you don't like the fund management, then invest elsewhere.
[Edited 2015-04-20 18:21:31]
I have a three post per topic limit. You're welcome to have the last word.