Source: Late LatePost
Author: Late Night Team

In 2017, Buffett introduced John Borg to 40,000 participants at the Berkshire Hathaway Shareholders' Meeting in Omaha, USA. Buffett said he probably contributed more to American investors than anyone else in the US.

“Borg, can you stand up?” Buffett shouted to the crowd.

Amid warm applause, the skinny Borg stood up, waved to the crowd, and bowed in the direction of Buffett and Munger's podium.

“I estimate that Borg has helped investors save a lot, a lot... the numbers will grow larger over time, at least hundreds of billions of dollars. Monday is Borg's 88th birthday and I just wanted to say happy birthday! Thank you for everything you do for American investors.” Buffett said.

This year, Buffett just won a 10-year gambling game. Eleven years ago, he proposed that a fund that simply tracks the US stock market can beat any confident hedge fund manager. Protege accepted the challenge a year later, with a bet of $1 million. Ten years later, the five FOF (investing in over 100 hedge funds) selected by Proteger had an average yield of only 36%, while index funds tracking the S&P 500 had a yield of 126%. This fund is a product of Borg.

Today, index funds have existed for more than 50 years, and their impact is everywhere: they are already the most popular investment option; even if you don't buy an index to buy individual stocks, the stocks you like are highly influenced by the index; even if you don't invest at all, you are in it.

This year, for the first time, US index funds surpassed active funds in terms of asset size. Currently, the largest stock fund in the world is an index fund, and the largest bond fund is also an index fund. The largest gold index fund holds more gold than most central banks, reaching 800 tons, or nearly 40% of the central bank of China's gold reserves.

According to the Trillion Index, by the end of 2020, the size of US public market index funds was close to $16 trillion. In addition to this, many private equity funds, large pension plans, and sovereign wealth funds also use indices or similar strategies. This means that, according to conservative estimates, around $26 trillion today, all it does is keep track of a certain index completely.

Buffett is one of the most outstanding active fund managers in investment history. He is good at selecting stocks and concentrating investments, but he always recommends low-cost S&P 500 index funds to ordinary investors. He feels that the level of most active fund managers simply cannot match the high fees paid by investors.

This scene from Omaha was recorded by Robin Wigglesworth (Robin Wigglesworth) in his book “The Trillion Index.” In his book, he talks about the evolutionary history and future prospects of index funds.

He believes that Borg is probably the biggest contributor to the promotion of index funds. In his book, he explains in detail the underlying theoretical foundations of index funds, how the index fund structure was invented, and who made index funds evolve into their current form.

The biggest innovation in the financial industry in the past 50 years

Wigglesworth has been in financial journalism for almost 20 years. A Norwegian, mocking himself, you can tell where he came from by his haunting name Wigglesworth. In 2015, Wigglesworth was the Financial Times's US marketing editor in New York. He asked himself, “What content is important but hasn't been fully reported?”

“Obviously, it's a passive investment revolution.” Wigglesworth was remembered for us in April of this year.

Although many people find passive investing boring, they pay more attention to hedge fund managers or private equity tycoons. However, he believes that passive investment is a financial trend that cannot be ignored. The scale of assets is rapidly expanding, and the impact is increasing accordingly.

He began writing related articles, the most important one being “Passive Attack: The Story of a Wall Street Revolution” (Passive Attack: The Story of a Wall Street Revolution). This article details how passive investing was born and how it is reshaping the financial industry.

He sparked his interest and wanted to write a book about index funds, presenting key figures in their development history, and also discovered some people who played an important role but went unnoticed.

He feels that understanding the extraordinary rise of index funds and understanding their historical background will help us understand the future.

It was a revolution that originated in Paris, France, but reaped the fruits of victory in America. Participants came from all walks of life, including farm workers, jazz musicians, physicists, seminarians, financial giants, and even movie stars. This group of rebels was treated coldly by the public and ridiculed by mainstream people in the financial industry, but they achieved extraordinary results.

In 2021, the book “Trillions: How a Band of Wall Street Renegades Regenerates the Index Fund and Changed Finance Forever” (Trillions: How a Band of Wall Street Renegades) was published. The size of the index fund also grew from $5 trillion to $26 trillion in the six years he reported and wrote the book. “The pace of growth has shocked even me.” he said.

Former Federal Reserve Chairman Paul Walker said in 2009, “The only valuable innovation the financial industry has made in the past 20 years is an ATM.” Wigglesworth said in his book that if he went a little further and looked back over the past 50 years, then he would say that the biggest innovation was the index fund created in the early 1970s.

Wigglesworth explained that almost everyone has directly or indirectly benefited from index funds. Over the past 20 years, thanks to the development of index funds and the pressure on index funds to adopt lower fees, the average cost of US stock mutual funds has been cut in half. This saved investors a trillion dollars. This money was left in the investors' own pockets, not given to so-called high-paying investment experts.

“The financial industry has always been good at inventing new products that can make more money, and index funds are a rare exception and don't follow this rule. As the gap between the rich and the poor continues to widen, it is encouraging that such an index fund, which was initially criticized and invented by a group of self-proclaimed financial rebels and heretics, can have a positive impact over a period of several decades.” Wigglesworth wrote in “The Trillion Index.”

When index funds were invented in the 1970s, few people believed they could beat most active funds. However, later data showed that in any rolling 10-year period, roughly only 10% to 20% of active funds outperformed the benchmark index. “Investing is a rare anomaly. Basically, the more lazy you are, the more you choose cheap passive funds, the more you get good returns.” Wigglesworth said.

The Chinese economy and the US economy account for about 20% and 25% of the global economy, but the market capitalization of the Chinese stock market (A shares and Hong Kong stocks) accounts for about 10% of the total market value of the global stock market, while the market value of the US stock market is close to 50%. As the most important and mature capital market, Wigglesworth feels that the trend that began in the US will also spread to Europe and Asia.

In addition to index funds, the rise of passive bond investments and the popularity of investing based on rules rather than manual stock selection (such as machine learning algorithms that continuously select the best stocks based on market technology and fundamental data) are all changing the market. As for traditional value investing, it is difficult for the average person to stick to it, but it is still effective because it is difficult and unhuman.

Unrecognized scholars lay the foundation for innovation

French mathematician Louis Bachelier (1870-1946) was the “godfather of index fund thought” in Wiggsworth's eyes. He was obscure during his lifetime, but later generations called him the “father of financial mathematics.”

In 1900, Bascelier, who worked part-time at the Paris Stock Exchange, obtained his doctorate degree with his thesis “The Application of Probabilistic Arithmetic in Stock Market Operations”. However, mentor Henri Pomgaray only gave a “good” rating. At the time, if you wanted to get a position in academia, you usually needed to get an “excellent” thesis. Wigglesworth speculated that maybe it was the area of thesis research that lowered his score. At the time, people generally believed that finance was a dirty, low-level field that was not worth studying in depth.

Bashelier was only able to teach probabilistic mathematics free of charge at the Sorbonne and lived on a temporary scholarship. He did not get a tenured teaching position at a university until age 57, and passed away quietly in 1946.

Eight years after his death, a professor at the University of Chicago discovered his work in the library and marveled that it was ahead of its time, so he enthusiastically promoted it to the American economics community, giving Baselier a belated honor.

Wigglesworth concluded that for the first time, Bachelier used rigorous mathematical methods to prove how financial securities operate in an unpredictable and random manner. Today, the more commonly used term is “random wandering,” as if a drunk man stumbles late at night while walking and stumbling. Overall, the market's performance is this kind of random fluctuation. Bachelier's research also helped explain one of the investment industry's most puzzling questions, which is why most professional fund managers perform so poorly.

Standing on Bachelier's shoulder, the three economists later constructed the random walk theory into a dynamic, multi-level model to describe how the market works and how investors should respond. They laid the academic foundation for the wave of passive investing.

One of the three is Harry Markowitz (1927—2023). In 1952, this doctoral student at the University of Chicago published his paper “Portfolio Selection,” showing for the first time how to better balance risk and return in a quantitative approach, which became the cornerstone of “modern portfolio theory.”

He used stock volatility to express risk, proving that distributed allocation of a basket of independent stocks can indeed reduce investment risk. This basket of stocks is what we later know as an “investment portfolio.” He suggested that investors should really be concerned about the overall performance of an investment portfolio, rather than obsessing over the performance of one of these stocks.

“Decentralized allocation, such as building a passive market-wide portfolio, is the only 'free lunch' in investing.” Markowitz said.

However, Markowitz's views were not widely accepted at the time. While defending his doctoral dissertation, he was interrupted by judge Milton Friedman after 5 minutes. Friedman said, “I read your doctoral dissertation. There are no errors in the mathematical derivation in it, but this is not a paper in the field of economics. We can't award you a doctorate in economics for a thesis unrelated to economics.” Markowitz's mentor and Friedman had a heated debate. Fortunately, Markowitz made it through.

A man named William Sharp worked with Markowitz during his PhD at the Rand Think Tank. Sharp was one of the few economists at the time who could use bulky computers. He wrote a program that simplified Markowitz's model. The formula in the program defines the “overall return on the market” (represented by the Greek letter beta), making it easy to calculate the change of each stock in relation to it. Later, beta became a generic term to describe the overall return of the market, while α was used to indicate the excess returns investors can obtain.

This earned Sharp his doctorate. He established a “capital asset pricing model” in his next research. The model first proposed “risk-adjusted return,” which means that the performance of a stock or fund manager should be measured based on fluctuations in earnings. The model also suggests that for most investors, the best approach is to invest in the entire market, as it reflects the best balance between risk and return.

Similar to the denial Markowitz received. Sharp submitted a paper on the “Capital Asset Pricing Model” in an academic journal in 1962, but it was rejected, arguing that the hypothesis was unrealistic. After many twists and turns, the paper was finally published in 1964, but there was no response. “God, I just published the best paper of my life, and no one cares.” Sharp recalls.

Research by Harry Markowitz's apprentice William Sharp (right) found that the stock market as a whole showed the best risk-benefit trade-off results. This research paved the way for the birth of the first passive fund to track the market. Image source: “Trillion Index”.

To explain the unpredictability of the stock market, Eugene Farma, a second-generation immigrant from Italy's Sicily, proposed the “effective market” hypothesis, that is, in an effective market, so many smart traders, analysts, and investors compete with each other. This means that at any moment, all known relevant information is reflected in the stock price, and any new information that appears will be immediately reflected in the price.

Reporter Wigglesworth sorted out various disputes over the “effective market” hypothesis, saying that the best explanation that the effective market hypothesis has long-term value comes from British statistician George Box. He once quipped, “All models are wrong, but some are useful.”

“The effective market hypothesis may not all be correct. After all, the market is constructed by people, and people are easily affected by various behavioral biases and irrationality.” Wigglesworth wrote, “But this theory, at least roughly reasonably, shows how the market works, and also helps explain why it is difficult for people to beat the market in practice. Even investment guru Benjamin Graham (note: Buffett's teacher) later became a supporter of the effective market hypothesis.”

In 1992, Farma and colleague Ken French proposed the “three-factor model.” By analyzing the performance of US stocks from 1963 to 1990, they found that both “value” and “size” influence stock earnings. In terms of value, cheap stocks tend to perform better than expensive stocks; in terms of scale, stocks with small market capitalization tend to perform better than stocks with larger market capitalization. These are two other factors that differentiate the stock market's overall beta factor.

According to the two, these factors can be seen as a reward for taking additional risks, and essentially still stem from the effective market hypothesis. Wigglesworth believes that this is an iconic event in financial history. Scholars have since discovered a range of factors, such as momentum (buying rising stocks and selling falling stocks). However, factors (such as buying small-cap stocks) don't work all the time; they may return like a pendulum after a long and painful period of deviation.

To this day, many investors, whether intentionally or not, follow the theory of Markowitz, Sharp, and Farma to manage their portfolio positions. All three scholars later won the Nobel Prize in Economics.

The financial industry's traitors and their “Manhattan Project”

John McQueen was a farm worker and naval engineer, and got into finance because of his computer obsession. He has a grumpy temper and strongly opposes the financial industry's “great man theory” — a gifted hero picks out stocks he thinks will rise, and when he inevitably fails one time, investors look to another hero.

“The whole thing was a luck-driven process; it wasn't systematic at all.” McQueen said. He wants to invest in a more scientific way. With the support of Wells Fargo, he brought together a group of well-known economists to conduct research. Wigglesworth said this could be called the financial industry's “Manhattan Project.” There are many future Nobel laureates in economics on the team, including Markowitz, Sharp, Merton Miller, and Fama student Myron Scholes.

In 1971, Wells Fargo launched the first passively managed, index-tracking fund in history, raising only $6 million. The fund is prepared to invest the same amount of money into each stock listed on the New York Stock Exchange (approximately 1,500), as this is the most approximate way to simulate the entire US stock market.

However, managers need to constantly adjust the composition ratio according to changing stock prices, which is too difficult to track. Wells Fargo has launched another more manageable fund that only tracks the S&P 500 index. The S&P 500 index also uses no equal weight calculation, but rather market capitalization weighting, that is, the weight share of each stock is determined based on its market value in the overall stock market.

The birth of index funds was fiercely criticized by the mainstream financial industry. At the time, a poster with Uncle Sam calling for “Let's get rid of index funds together. Index funds are not American!” In 1975, two employees of Wall Street giant J.P. Morgan warned: “The role of the entire capital allocation in the securities market will be disrupted, and only those stocks included in the index are likely to rise.”

An active fund manager complained to the Wall Street Journal: “If people start believing in random crap and invest in index funds, then a large number of fund managers and analysts with an annual salary of $80,000 will lose their jobs and be replaced by computer workers with an annual salary of $16,000. This is never going to happen.”

Wigglesworth feels that these remarks are sufficient proof that the innovation of index funds comes from some small financial institutions in the second and third tier, not from any traditional Wall Street giant; it is something inevitable.

Index funds received early support from some institutional pension heads. Because they realise that many active fund managers are nothing more than “hidden index investors.” These fund managers are essentially copying the overall performance of the stock market, but they charge huge fees, as if they put a lot of effort into finding the best stocks.

Paul Samuelson (1915-2009) was the first American to win the Nobel Prize in Economics and a promoter of Baselier's idea of “random wandering” in the US. He compared the birth of index funds to the invention of the wheel, the alphabet, the Gutenberg printing press, wine, and cheese.

In the 1970s, Samuelson wrote articles in the mass media. By citing academic research, it was shown that most active fund managers performed much worse than the market. Most mediocre fund managers trade frequently and try to beat the market, doing nothing and losing transaction fees.

“I also don't want to believe this is true. But out of respect for the evidence, I have to agree with the reasoning that most fund managers should quit the industry and get a different job.” Samuelson wrote. He also called on more institutions to establish large passive funds that track the S&P 500 index.

John Borg (1929-2019), founder of Pioneer Pilot and the most famous promoter of the index fund known as “Saint Jack,” recalled in his autobiography: “Dr. Samuelson's advice hit me like lightning and ignited my faith. I believe Pioneer has an excellent, if not unique, opportunity to operate a passive, low-cost index fund and dominate the market for at least the first few years.”

In 1976, Pioneer Pioneer launched the “First Index Investment Trust”, the first index fund in history aimed at individual investors. This index fund tracks the S&P 500. At the time, operating expenses were about 0.3% per year and transaction fees were about 0.2% per year, roughly 1/10 of the internal operating costs of an active fund. However, most ordinary investors are keen to pursue star fund managers, and the size of the “First Index Investment Trust” was only $14 million by the end of 1976. The mockers called it “Borg's folly.”

The US bull market in the 1980s and the advent of 401 (k) retirement plans fueled the rise of pioneers. 401 (k) retirement plans originated with the 1978 Tax Act, which encouraged every American to save for their own pension by investing in equity funds.

The size of the “First Index Investment Trust” (now renamed the “Pioneer Pilot 500 Index Fund”, the one used by Buffett Gaming) reached 1 billion US dollars in 1988 and surpassed 100 billion US dollars in 2000, making it the largest mutual fund in the world. Pioneer Pilot also went from being a small marginal company to the second-largest asset management company in the world, with a management scale of nearly $8 trillion, second only to BlackRock's $9 trillion.

Pioneer leadership owes its success to Borg, a charismatic leader. He promoted index funds with the passion of a savior, persuaded the investment industry to let more people get fair trade opportunities through low-cost passive investment tools. He is known as “Saint Jack,” or the “moral voice” of the asset management industry. Admirers believe it was he who pulled hundreds of billions of dollars out of the pockets of Wall Street greedy people.

Wigglesworth said that Borg is approachable and exudes an air of integrity and authority. He has a deep, loud baritone and an amazing talent for storytelling. He did his best at work and was self-propelled like a nuclear power, but he was also fierce, proud, arrogant, unwilling to listen to objections, and was passionate about refining his legends in his later years. Wigglesworth felt that the combination of these characteristics was a real, complex Borg, not a false great man with no flaws.

Borg was also the most impressed interviewee for journalist Wigglesworth. He recalled that at the end of December 2018, before “Passive Aggression: The Story of the Wall Street Revolution” was published, Borg called him and asked if he had everything he needed. Because Borg said he's going to the hospital soon, he probably won't come back. Wigglesworth was very moved by this. A few weeks later, Borg passed away.

The invention of ETFs has reshaped the flow of money, but new problems have arisen

Nate Most (1914-2004), the inventor of exchange-traded funds (ETF), did not enter the securities industry until the age of 63, as head of the derivatives development department of the US Stock Exchange. Wigglesworth said that Most's early years of extensive knowledge provided inspiration for his inventions.

Most's parents are Jews who fled the Holocaust in Eastern Europe. He originally studied for a doctorate in physics, but he dropped out of business due to the Great Depression and earned his living by selling audio equipment. In “World War II,” he was responsible for developing and testing sonar aboard Pacific submarines. After the war, he traded commodities.

While working on a Pacific ship, he saw the efficiency of traders trading commodity warehouses, which is more convenient than trading physical coconut oil, crude oil, or physical gold.

“Once you have stored the product, you get a copy of the product warehouse receipt, and then you can directly trade the warehouse receipt... You don't have to carry these physical products back and forth all the time.” Most recalls.

He thought the US stock exchange could set up a legal warehouse to hold stocks in the S&P 500 index, and then generate a list of shares in this warehouse for people to trade. However, the US stock exchange has no authority to manage such products; it needs to find partners.

Eventually, State Street Bank took charge of managing the first ETF, but due to multiple scrutiny by US regulators, Canada's Toronto Stock Exchange preemptively issued the world's first ETF, the Toronto 35 Index Participatory Fund, in 1990. Three years later, the “Standard & Poor Depository Receipt” (SPDR) managed by State Street Bank has finally been approved and launched, and has now surpassed $100 billion. State Street also ranks as the fifth largest asset management company in the world, with a scale of nearly $4 trillion.

Wigglesworth believes that if Wells Fargo Invented Index Fund is compared to the “Manhattan Project” to develop an atomic bomb, then the emergence of ETFs can be compared to a hydrogen bomb. Compared to first-generation index funds, ETFs have contributed more to reshaping the financial industry. This is thanks to the LEGO-like nature of ETFs, which enable everyone, from retail investors to fund managers, to better develop investment strategies or build complex portfolios.

“The rapid growth of ETFs is changing the trading floor, restructuring the market, stirring up the investment industry, and even slowly beginning to affect corporate governance.” Wigglesworth wrote, “As to how it was affected, people are only just beginning to study it.”

BlackRock Chairman and CEO Larry Fink compared the impact of ETFs to Amazon's transformation of the retail industry: lower prices, more convenient transactions, and more transparent processes. “The asset management industry was not inherently designed this way; they have always been opaque and complex representatives,” he said.

Interestingly, when looking for a partner, Most first visited Borg, but Borg rejected the ETF product. He is concerned that ETFs may turn pioneering index funds from a long-term investment tool into a hedge fund and a speculative tool for frequent traders. He told Most: “You want people to trade the S&P Index, and I just want people to buy it and then never sell it again.”

Borg later compared ETFs to the best shotguns. “It's very useful for hunting large animals in Africa, but it also works very well when used for suicide.”

A segment of US public index funds. To date, stock index funds are the largest group, but bond index funds will reach another level in the next 10 years. Image source: “Trillion Index”.

The ETF's development far surpassed his expectations. It now accounts for 1/3 of the total trading volume on US exchanges, with a volume of 9 trillion US dollars. The number of ETFs has grown from less than 100 in 2000 to nearly 10,000 today, which is dazzling. These ETFs have various ideas, such as solar energy, artificial intelligence, the rise of the millennial generation, making more women board members, ESG, biblical responsibility (excluding companies that do not meet biblical values, such as abortion, pornography, LGBT), Islam (excluding alcohol, casinos, banks, etc.), the US bond market, high-risk bank loans, and financial volatility.

Wigglesworth felt that index funds were invented because most people are bad investors, and the best way to obtain returns is to hold a sufficiently diversified investment portfolio with a large number of securities for a long time. But the proliferation of ETFs has now completely erased the blurred line between active and passive, especially considering that the construction of a benchmark index may be relatively opaque, so dire consequences are likely to occur.

He pointed out that there is now a recent trend called “actively managed ETFs.” These products use ETFs instead of traditional structures and can enjoy preferential ETF rates, but they are still essentially active funds, including analysts, traders, portfolio managers, etc. Such products have even spawned “actively managed opaque ETFs,” which disclose positions not every day, but at intervals.

“No matter your investment grade, there's always an ETF to suit you. This may be true, but the negative effects are real: people invented index funds to eliminate the original sin of humanity, and the evolution and spread of ETFs gave investors an opportunity to commit the same original sin again.” Wigglesworth reviews.

Borg lamented in his later years, “The flame ignited by ETFs not only changed the shape of index funds, but also changed the entire investment sector. I can say without hesitation that Most's visionary ETF invention was definitely the most successful financial marketing tool up to the early 21st century. However, it is not yet known whether it is the most successful asset management method of the 21st century.”

But it is clearly unfair to blame the ETF as an innovative tool. After all, one of the main themes of capital markets is how to fight against humanity, such as thematic hype, frequent trading, chasing ups and downs, overconfidence, greed, and fear. ETFs are nothing more than opening Pandora's box once again. It can keep funds from losing to the market, but it can't control investors' greed and fears.

Indexing and the concentration of fund companies are worrying

It's been 140 years since the index was invented. The starting point was in 1884, when financial journalist Charles Dow selected 11 stocks, calculated an average of their share prices, and then published the rise and fall of the average in newspapers every day. This is the earliest index. Five years later, the newspaper changed its name to The Wall Street Journal. After another 7 years, Dow founded the first pure industrial stock index that is updated daily, the Dow Jones Industrial Average that is well-known today.

Many countries now have their own indices, such as the Shanghai Stock Exchange, Shanghai and Shenzhen 300, Nikkei 225, FTSE 100, S&P 500, and NASDAQ. The invention of the index allows people to talk specifically about changes in the capital market, such as a 2% increase and a 100 point drop. Their daily updates have become indispensable material for business news from around the world.

Wigglesworth said that the index was initially a service provided to readers by the media, such as the American “Wall Street Journal”, the British “Financial Times”, and Japan's “Nikkei.” These indices are monotonous and boring, and no one wants to make money from them. But now, thanks to the invention of index funds, creating benchmark indices has become a lucrative industry.

The existing “Big Three” are Morgan Stanley, FTSE Russell, and Standard & Poor's Dow Jones Indices. They occupy 70% of the market share of the entire industry and form the financial industry's most hidden “power spokespersons.”

For example, whether a company's stocks or bonds are included in a mainstream index can change its fate. For example, Morgan Stanley announced in 2019 that one of its indices was considering including a small marble mining company, causing its stock price to soar 3800%; an employee at Standard & Poor's Dow Jones Indices received news about which companies would be included in the index. As a result, he bought these companies early and made a net profit of approximately $900,000. In 2020, he was sued for insider trading.

Large companies are also affected by it. For example, Unilever considered moving its headquarters from London to the Netherlands, but later realized it would withdraw from the UK FTSE 100 Index and dismissed the idea of moving; Tesla has not been included in the S&P 500 because it hasn't been profitable for 4 consecutive quarters for a long time. After meeting the requirements was included in 2020, the stock price soared. On the day the S&P 500 was officially incorporated into operation, Tesla's stock price rose another 70% compared to when the news was first announced.

In 2017, Standard & Poor's Dow Jones Indices announced that its S&P 500, 400, and 600 indices will no longer include companies with “the same shares but different rights,” but existing companies, such as Google and Meta, can remain in the index. “Same shares, different rights” exist in many technology companies, that is, the founder has control over the board of directors even though he has only a few shares.

Wigglesworth feels that this incident shows how index companies can put pressure on core areas of corporate governance by formulating rules. “This may be the right decision, but others will argue that these decisions are best left to the legislature and regulators, rather than private companies.”

The power of index companies can influence not only companies, but also countries. For example, Morgan Stanley issued a warning in 2016 that it intended to downgrade Peru from an “emerging market” to a lower “frontier market” on the grounds that the local exchange was too small. The downgrade of the rating could have a disastrous impact on Peru's foreign investment environment. Ultimately, after the Peruvian government actively lobbied and promised to support the exchange, Morgan Stanley promised to stop and not downgrade.

“Their decisions, whether or not to put you in the index, greatly influence investors' decisions. They really control the fate of many countries and companies in the capital market.” Peru's Finance Minister Alfonso Segura Vasin said publicly.

The problem of excessive concentration of power is not limited to the Big Three Index Compilers, but also the Big Three Index Funds. Over the past 10 years, 80% of the capital invested in US stocks has gone to BlackRock, Pioneer Pilot, and State Street Street. The top three index funds hold the sum of all company shares in the S&P 500 index, which has increased from about 5% in 1998 to more than 20% today.

Since not every investor votes at the annual shareholders' meeting, the Big Three account for about 1/4 of the total number of shareholders' votes. However, asset management companies do not invest on their own; instead, they outsource corporate governance tasks such as voting to consulting firms. These consulting firms are known as “voting advisors,” and currently the two largest companies are Glass Lewis and Institutional Shareholder Services, which basically monopolize this segment of the industry.

Many people are concerned about the excessive concentration of power in these companies. Hedge fund manager Paul Singh is one of them. He has successfully recovered $2.4 billion in debt from Argentina. He said, “When making investment decisions, more and more investors do not research and evaluate the company at all, do not consider the corporate governance situation or management level, and do not actually examine the company's long-term prospects. Instead, they directly hand over the burden of stock selection to index providers and index fund issuers. What does this kind of behavior mean to capitalism? growth? Innovation?”

Even Borg, an entrepreneur who benefits from the scale effect of exponential investment, is worried that if the industry's oligopoly situation continues, eventually all major US listed companies will have control over voting in the hands of a few companies.

“US national policy should focus on this growing power and seriously consider its impact on financial markets, corporate governance, and regulation. This will be the main problem to be faced in the next era. My opinion is that this increasingly centralized situation is not conducive to the development of the country.” He said it shortly before his death.

Elon Musk shares Borg's views, but his solution is “we should switch back to active investing,” and “passive investing has gone too far.”

Wigglesworth said that the development of index funds has many potential negative effects to pay attention to, but his personal biggest concern is the concentration of power in the company, and he believes that we should always be alert.

However, he also quoted another quote from before Borg's death: “We must not ignore the existence of a problem. It's just that we can't destroy the greatest invention in the history of finance in order to solve the problem.”

Editor/Somer