MoneyBeat Extra: Passive Investing Overruns Active

This transcript has been automatically generated and may not be 100% accurate.

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Wall Street Journal ... now my ... duty as the New York ... euro Paul vignette and Stephen dresser ... hello everybody welcome to the MoneyBeat podcast here in New York City Hall and Steve in the studio ... along with Dave Benoit and Sarah Krouse and Moulton Piero Paige's Dewan ... and her grandmother and her music ... there is not an antenna and as the idea I'd I didn't is I've got awesome and it's good music and I get all usually gets them every single time I compose that ... and any talent ... nine ... um ... let's talk with a reason why we wanted ahead due to his cruise you're in a piece in our series ... our ongoing series the pessimists about the ... shift from a ... active managers to passive managers find out fund managers on Wall Street ... and the two of you wrote a story cut an interesting ... something that you wouldn't think off the copier head off about the ramifications of this issue ... that always struck me as this is sort of like the wind from the Spiderman ... when great power comes great responsibility ... and has a certain place with repealing the kids I am DeGioia IMO like to appeal to them on deals yet ... especially if you are ... you on line deals in its attempts ... to that the drachma ... but they are like we're putting our money in index funds ... the three are right back into it right back ... on but we talked to though ... what you guys wrote about which is the fact that ... these passive fund managers have become need your players ... in corporate governance ... scanning as we set out to do this we looked at the money flowing into index funds and is an update ... as that ... took its asset summarizes what does that mean for how they're voting their shares ending Bejing winsome the biggest companies in American and globally for that matter ... and so it Regado NS was the uncle inside the boardroom a little that talk to you the teams that are charged with voting shares in teaching on these issues and ... and one other thing is that that was part of this look as well as on the criticisms that they feel they are down and fire from activists investors he said that they don't have enough staff addressing these issues that are not being active enough that their ... uncle passive in the boardroom and so we're trying to sort out the known and what what does their work on is actually look like ... historically ... Lee you what was a role ... to ... ensure they didn't spend a lot of time or put a lot of resources into this type of work I think that something really in the last three to five years that the large managers of indexed bonds have really set up a week to bulk up and involve more time and resources to this ... the interesting Lee when things we've found is they're saying you know we don't need to talk to a company on every single issue every single year ... we're going to the owners a matter what if the stock is in the index the half to own and presented each year for a long period of time so let's get honest Angela that freeze for three to five years we checked and we see of things are going if there's an issue in the meantime and light trucks that ... we can spend our time every single year in every single company in NS but that so it was really different here it Sir Rod does investors in ... in the world of ... active management even you view typically have a portfolio manager who has an idea about the stock and follows it ... any follows a basket of ten or ... twenty companies ... these guys these index funds have ... teams of ... like fourteen and twenty for for thousands of stocks re were talking Vanguard fifteen people thirteen thousand companies globally ... that they're following the detonator to a REIT they have to vote to share so when someone comes up when when they're electing a director or in ... the second compensation for an election ... their vote matters are criminal acts of ink ... the most interesting stats in this entire series is that ... Vanguard ... in two thousand five had ... a five percent stake in three companies be Essen P five hundred ... and now it has a five percent stake ... in ... ninety four percent ... right ... that is like anomaly by the Senate yet ... yet in a five percent stake is incredibly important these votes for a while ... and the passive funds yet clear when you have to file when you own five percent ... right ... now that's the other thing ... right but if I'm public Stephen essentially on and that's it that's a huge and and and that's because that is a huge say in what happens to these companies for a five percent sitar like ... threshold between you don't know if they knew they were quite a folly than for computer potentially ... depending whether you're going to be ... an active or passive investor ... well I feel it's crazy to think passive funds ... um what is the definition of pacify me the idea is in ... rediscovering lesson Leslie guess is that ... it isn't so much that ... they had the cake no voice ... it's that they're falling and excellent that the passages about what they're holding ... lesson lessons about what they're doing with Apple ... why was there ... with a scarcity is like what if they don't like what a company is doing they can to sell and move on like an active manager when their stock so I think they've taken the view that we better get to have a long-term elation job of the company and put our foot down and we need to you in the form of a vote that we can afford you know we don't like something one year we can give it time to free sample Mylan has been in the news recently ... for increasing the prices at the hands ... and BlackRock voted against their executive compensation this year and before that buyers are really cake topper reached a boiling point ... but three years prior ... from our reporting and raise questions about what they size intensely excessive ... executive compensation so ... that's the sort of an example of that long-term horizon that they bring rather than view an activist locking the door with a textbook saying we want this takes down a seat on the board lets up right ... right there they're very open to St ... essentially ... you are our role is a shareholder isn't ... to be ... a direct team ... you know how much leverage should have how much stock into buying back ... on those decisions that essentially are becoming ... five points for for activists in and were seen alot of debate you know like ... um should Apple have ... a trillion dollars in cash discounted in the ... centers ... that ... much ... aam ... but the these guys are saying was and that's our job ministry gets around the company were in S Korea say when when we we feel their overstepping the bounds ... aam but it's it's a cinema very different viewpoint than me off in your pocket one of the one person to assist Oracle E ... column pass the bombs loaded it sounds like one large Davao ... with management ... yesterday saying they do deferred to management and that is still the case Nenad think that some ... large managers would argue that when it comes to particularly contentious votes they're not afraid to bet against management if you look at the Verging sense of that is still probably the kids and I was off last one is out for the activist investor ... because as these funds own five percent and increasingly ... however some companies ... that Europe is humid dealing from a viewer view of ... something that the board needs to vote on whether the board itself ALM ... yelled these key Visa passive funds have a significant say ... in who whence ye exactly that's that and that sort of like the activists ... course theories ... is ... that autumn was going to happen in the part where ... Nelson Telstra Dome airport and essentially ... didn't get on the board largely because ... none of the passive funds or passive funds ... supported his election whereas ... a large majority of the active funds did ... aam ... actively managed ... but essentially ... there there is there is there are lots of examples of of index funds and BlackRock and Vanguard State Street all supporting activists they been doing it in there they're not shy about saying ... listen about half the time are going to think about going overboard in a ... book to do it ... aam ... but ... it's true there ... it's it's like a Hurley have to get it but if you get them then ... it's crazy your way frequently so ... the time it cuts both ways isn't just an talking to the companies ... that ... are steering from the act is hearing from index funds ... some say that they're at the table were meeting with BlackRock were gone aam earning meeting with an iron ... others say if ... you were there to pass it we don't hear anything from them you know ... what what is the burden of that it be or they can come to the boardroom one-day or does it not ... you know is that something I'll never be on their radar ... and so I think is the summing that's playing out in real time now and I think that these find the answers are trying to get their arms around what what the right balance is given that ... these funds lets face a charge a fraction of a percentage point so ... you know you only have so much money coming in the door from these ultra low cost funds in the first place he has us wondering if the Pentagon to that is ... does this become a situation where it's more vile pendulum swinging kind of thing between active managers and passive where is this ... lake a ... trend that is moving in a direction I mean you see swings in this race is just a one-way street ... the fund flows ... I think most people ... most people from investors ... it it it seems like it's ... a one-way street ... I will ... continue at the same clip that it had ... maybe not forever and an active managers I think would argue ... there is a ten John A will swing back to a degree there will be more money coming back into active funds eventually ... Yellen Cuno's but do I think that the power that these index funds hold will decrease from here not necessarily ending I think that there is a substantial amount of assets in these funds now ... and with that calm seas voting powers so I think that to that ... extent there is a little bit of a new world that's emerging now it is here to stay ... one would listen to this is it just ... me or looking back historically ... how much were ... neutral funds and pension funds and other big ... institutional holders of stocks ... so the ... active engaging with management ... aam prior to the rise of cannabis passive ... funds ... they weren't ... there weren't ... and even the quota incorporate actively managed ... investors ... are not activists ... like Fidelity or tier or something ... it historically they'll speak up every once in awhile ... very rarely publicly ... but ... they have the same you know in the nineties when when ... you know Magellan was becoming a gigantic asset ... holder ... on ... they did the same thing they just didn't fit in view is their role to ... impose themselves upon management where we really seen a shift is kind of ... the post Enron and WorldCom world ... where people said ... they wait a second ... session villages finely trust management is looking out the best of us ... time and the financial crash ... really kind of kicked at home ... even harder ... in the nets pet's name Fed this rise of activism which is sort of shifted to get ground game assertive viewed now is no longer ... um ... dad to raise your questions about management team spirit and gas from ... her current role ... their ... story from both of you thank you for coming on to the team in a moment so that when the secretion of will force in Evelyn thank you for