Can we really understand the impact of passive ownership on the US market? Marco Sammon is an Assistant Professor in the Finance Unit at Harvard Business School. During this episode, he joins us to share deep insights into the complex and counter-intuitive nature of the index fund revolution. To kick off our conversation, we discuss some of the challenges associated with getting a true understanding of the scope of passive ownership across the US. Distinguishing between different approaches to investment, we begin to unpack Marco’s paper with Alex Chinco, titled ‘The Passive-Ownership Share Is Double What You Think It Is’. We touch on the relevance of Grossman Stiglitz in 2024, pricing and reconstitution, and the ins and outs of employee stock and compensation. Using the case studies of huge global firms, we consider how to best accommodate passive demand. Lastly, as an index investor who does not own index funds, Marco shares his opinion on whether index funds have had a net positive or negative impact on financial markets. Tune in today to get a more dynamic view of the complex world of index funding and investment.
Key Points From This Episode:
(0:00:45) Index funds, index and passive investments, and why Professor Marco Sammon is perfectly positioned to unpack these concepts.
(0:03:36) The challenges of understanding just how big passive ownership is in the US market.
(0:08:16) Distinguishing between partial investment, direct investment and passive funds.
(0:10:14) Important concepts on the closing auction and which indexes Marco focuses on.
(0:15:50) Defining the Grossman-Stiglitz framework and its validity in 2024.
(0:20:36) Evolving ideas around pricing and reconstitution over time.
(0:23:05) Why indexing is a fixed-point problem and how to measure market efficiency.
(0:32:19) Nuances of security demands around indexing and how it differs from other investors.
(0:38:02) Employee compensation and reverse causality as illustrated by Marco’s friend.
(0:42:10) Why it is important to distinguish between equal-weighted and value-weighted.
(0:44:13) How huge firms like Facebook and Tesla accommodate passive demand.
(0:48:19) Conditions that affect the responsiveness of firms in accommodating passive demand.
(0:51:13) The ‘Dead Reckoning’ metaphor to describe how we can know who is clearing the market.
(01:02:22) Marco’s thoughts on whether index funds have had a net positive or negative impact.
Links From Today’s Episode: Meet with PWL Capital: https://calendly.com/d/3vm-t2j-h3p
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Rational Reminder Email — info@rationalreminder.caBenjamin Felix — https://www.pwlcapital.com/author/benjamin-felix/
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Episode 302: Michael Green — https://rationalreminder.ca/podcast/302
Papers From Today’s Episode:
‘The Passive-Ownership Share Is Double What You Think It Is’ — https://www.hbs.edu/ris/Publication%20Files/double-what-you-think-it-is%20may%2023_3c1ae213-5aec-407d-b656-13e3822f0b8b.pdf ‘On the Impossibility of Informationally Efficient Markets’ — http://www.dklevine.com/archive/refs41908.pdf
‘Capital Asset Prices With and Without Negative Holding’ — https://ideas.repec.org/p/ris/nobelp/1990_003.html
Do Demand Curves for Stock Slope Down? — https://www.jstor.org/stable/2328486/
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