Institutionalized Investing

I had read about the rise of institutional investors, mutual funds, pension funds and the like, but a NYT op-ed by Eric Posner, Fiona Scott Morton and Glen Weyl places that rise in terms that require thought, if not concern.  In 1950 institutional investors made up 7% of the market, today it is 70%. Among the largest investors are Blackrock with a total of 5 billion in assets and Vanguard with a total of 3.5 billion. These firms, which obviously buy substantial amount of stock, work for the benefit of their customers, not necessarily for the good of the whole, the nation. According to the authors, they also do not seem to be concerned by the challenge they pose to competition, and therefore to the consequences the lack of competition in a given field engenders. Vanguard, for example, owns stock in several banks, and actually owning stocks in several companies in the same sector is common.  This means that both these firms, as others who would also be heavily invested in a given company, are active in the management of the company as a way to protect their investment. They usually have a say in who serves on a board, or if not can be consulted. The lack of competition, the article points out, ends up hurting the middle class because the firms look out for profits, which means looking for a high yield, something which usually translates as low labor costs. Besides salaries, jobs may also be involved. The authors suggest solutions such as only owning a stock in one company in a given sector, solutions which given today’s financial and political environment may or may not be optimal or feasible. Regardless the issues raised by this article go deeper. Given the size of these mutual funds, given the number of people affected, no doubt including some of this piece’s readers, we need to ask, how complicit are we in this system? We want the funds we invest in to give a high return, for after all those high returns may protect our 401Ks. Yet,  if we want things to change, if we want these firms to act more along the lines of the public good, in this case the middle class, are we willing to take the consequences and end up with lower returns?