In today’s Wall Street Journal, Jason Zweig frets about the popularity of index funds:
If investors keep turning their money over to machines that have no opinion about which stocks or bonds are better than others, why would anyone want to become a security analyst or portfolio manager? Who will set the prices of investments? What will stop all stocks and bonds from going up and down together? Who will have the judgment and courage to step in and buy during a crash or to sell during a mania?
First of all, it hardly seems like the entire stock market is liable to become one big Vanguard fund: as Zweig says later in the piece, “indexing accounts for 11.5% of the total value of the U.S. stock market.” Big institutional actors have special needs which give them reason to actively manage their funds. And an institution like Wisconsin’s pension fund, which manages about $100b, isn’t giving away 2% of its money per year to a manager, the way you or I would. (This document says we spent $52.5 million in external management fees in 2013; percentagewise, that’s less than I give Vanguard for my index. Update: I screwed this up, as a commenter points out. Our external management fees increased by $52.5m. They present this as a substantial percentage of the total but I can’t find the actual amount of the fee.)
But second: am I supposed to be upset if it becomes less attractive to become a portfolio manager? One out of six Harvard seniors goes into finance. Is that a good use of human capital?
(By the way, here’s a startling stat from that Harvard survey: “None of the women going into finance said they would earn $90,000 or more, compared to 29 percent of men in finance.” Is that because men are overpaid, or because we lie about our salaries the same way we lie about sex?)