Calling Out Index Fund Activism

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Along with Warren Buffett, the lesser-known half of the dynamic duo that has piloted Berkshire Hathaway for so many years is Charlie Munger. Munger recently spoke some truths out loud that many C-suite executives have been thinking to themselves, but failing to express. The problem Munger highlighted is one already known to readers of Your Survival Guy, activist (not to be confused with active) index funds. These are funds that vote the shares (investors’ shares) in an effort to push a political agenda. The Wall Street Journal’s editorial board describes Munger’s comments, and expands on them, writing:

When you’re 98 years old you can say things others can’t, so bravo to Charlie Munger for daring to speak an important but too muffled truth about today’s financial markets. “We have a new bunch of emperors, and they’re the people who vote the shares in the index funds,” Warren Buffett’s Berkshire Hathaway partner said Wednesday. “I think the world of Larry Fink, but I’m not sure I want him to be my emperor.” Many CEOs no doubt privately agree.

As Americans have poured savings into exchange-traded and mutual funds, index providers have become the de facto largest shareholders of public companies. Assets under management by Mr. Fink’s company, BlackRock, have doubled to $10 trillion since 2016.

Asset managers, including BlackRock, Vanguard and Fidelity, mostly invest their customers’ money in broad baskets of stocks that track an index like the S&P 500. Index funds make sense for most retail investors who lack the time and information to actively trade stocks. But lately these so-called passive index providers have themselves become activists, and not in a good way.

Rather than push companies to pursue higher returns, they’re trying to impose their political agenda on corporate America. CEOs and corporate boards can find themselves on the wrong end of a shareholder vote if they refuse to accommodate BlackRock’s policy preferences on climate and “stakeholder capitalism.” Hail, Caesar, er, Larry.

Two years ago Mr. Fink wrote a letter to CEOs threatening to vote against corporate managers if they didn’t follow environmental, social and governance (ESG) disclosures prescribed by the Sustainability Accounting Standards Board. That Michael Bloomberg -backed outfit wants companies to report minutia from how much plastic they use to sales from sugary beverages.

In his annual letter this year, Mr. Fink did have some nice words about capitalism, which has been very, very good to him. But he also lectured CEOs that “employees are increasingly looking to their employer as the most trusted, competent, and ethical source of information,” and “stakeholders” including employees, customers, communities, and regulators “need to know where we stand on the societal issues intrinsic to our companies’ long-term success.”

Mr. Fink will also tell you what stand to take on those issues. He and his allies have become major swing votes in proxy board battles and shareholder resolutions. Climate-focused activist fund Engine No. 1 held only 0.02% of ExxonMobil shares, but it nonetheless managed to oust three board members last summer with the support of the Emperors’ club.

“Many savvy governance observers were paying close attention to how Exxon’s top three investors—Vanguard, BlackRock, and State Street, in that order—voted,” a Harvard Law School Forum on Corporate Governance article noted. “The Big Three, which own roughly twenty percent of the S&P 500’s outstanding shares, had made significant climate commitments over the past several years.”

Berkshire Hathaway makes selective investments in companies, and with great success over decades. So Mr. Munger may have a philosophical investing difference with index funds. But that doesn’t mean he’s wrong about BlackRock’s market power, which Mr. Fink is using for political purposes. We hope Mr. Munger’s comments trigger a larger debate about the Emperor and his commands.

You can read more about index funds using their power to pursue political ends here:

• ESG Funds: You Invest, They Win—Here’s Why
• You Invest, They Win: ESG Is a Money Grab
• BLACKROCK’S BITCOIN-ESG PARADOX: You Can’t Have It All
• BLACKROCK’S BILLIONS: Guess Where Those ESG Fees Are Going?
• ESG Ratings Are a Subjective Mirage
• It’s a Trap: High Fees Hamstring ESG Returns
• TUCKER EXPLAINS: The King of the WOKE INDUSTRIAL COMPLEX

Action Line:  If you need help building a portfolio with avoiding activist index funds in mind, I would love to talk with you. If you would like to get to know me before we talk on the phone, there’s no better way than signing up for my free monthly Survive & Thrive letter. In the letter each month, I encourage and push you to achieve the personal and financial security goals you’ve set for your family. Click here to subscribe. We’ll get to know each other, and get serious about your future success.

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E.J. Smith - Your Survival Guy

E.J. Smith is Founder of YourSurvivalGuy.com, Managing Director at Richard C. Young & Co., Ltd., a Managing Editor of Richardcyoung.com, and Editor-in-Chief of Youngresearch.com. His focus at all times is on preparing clients and readers for “Times Like These.” E.J. graduated from Babson College in Wellesley, Massachusetts, with a B.S. in finance and investments. In 1995, E.J. began his investment career at Fidelity Investments in Boston before joining Richard C. Young & Co., Ltd. in 1998. E.J. has trained at Sig Sauer Academy in Epping, NH. His first drum set was a 5-piece Slingerland with Zildjians. He grew-up worshiping Neil Peart (RIP) of the band Rush, and loves the song Tom Sawyer—the name of his family’s boat, a Grady-White Canyon 306. He grew up in Mattapoisett, MA, an idyllic small town on the water near Cape Cod. He spends time in Newport, RI and Bartlett, NH—both as far away from Wall Street as one could mentally get. The Newport office is on a quiet, tree lined street not far from the harbor and the log cabin in Bartlett, NH, the “Live Free or Die” state, sits on the edge of the White Mountain National Forest. He enjoys spending time in Key West (RIP JB) and Paris. Please get in touch with E.J. at ejsmith@yoursurvivalguy.com To sign up for my free monthly Survive & Thrive letter, click here.

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