Texas Asks If Index Funds Are Illegal

The theory is simple. A handful of big asset managers run giant index funds and own large chunks of every public company. Roughly speaking, the “Big Three” managers (BlackRock Inc., Vanguard Group and State Street Corp.) together own 20% or so of most public companies, and when you add in smaller quasi-indexers it is approximately true that most companies are mostly owned by diversified institutional investors. Therefore, the theory goes, most companies will tend to act in the interests of those diversified investors.

Often that means that the companies will do what they would do anyway, if they had different, non-diversified shareholders: They will try to increase sales and profits, etc. But not always. In particular, it does the shareholders no good if one company increases its market share at the expense of another company: The shareholders own both companies, so what they gain on one they lose on the other. In fact, if one company increases its market share by cutting prices and starting a price war, then the shareholders lose more than they gain. The shareholders own every company, and they want what is best for the companies collectively, not what is best for any individual company.