Saturday, April 16, 2005

The problem with index funds

The New York Times > Business > Media & Advertising > While Shares Fell, Viacom Paid Three $160 Million

I've long been an index fund investor. Historically, that's where the smart money has gone. But are times changing?
The top three executives at Viacom Inc. received total compensation last year valued at about $52 million to $56 million each in salary, bonus and stock options, the company disclosed yesterday.
And then there's AIG, a company that threatens to make Enron look good and send Warren Buffett into retirement.

The power of index funds is that they benefit from low operating costs and the distributed "intelligence" of the market. But what if corruption is rampant in the economy, and more than a few companies are making a transition from symbiotic to parasitic relationships? If that's true, then index fund investors are simply feeding funds to corrupt organizations. But where are the index fund managers? Vanguard and Fidelity, large index fund managers, had their chance 4 years ago to help clean the mess, but they chose to stand aside.

Perhaps we'll discover that index funds work best in a relatively honest and transparent marketplace. Maybe we'll learn that funds like Calvert will become more effective in a relatively corrupt marketplace. Perhaps and maybe are great weasel words, but we'll be accelerating moves into Calvert (though I hate adding complexity to my investment world).

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