The Active Construction of Passive Investors: Toward Robo Economicus

It is well-documented that the past few decades have marked an institutional shift in much of the capitalist world from a corporate doctrine of “retain and reinvest” to “downsize and divest.” The reason has been largely attributed to rise of the shareholder in exercising power over a market for corporate control. Managers deemed incompetent are replaced, with the measure of fitness ever increasing short-term profits, manifest as increasing share price. This power has risen from so-called institutional investors, such as mutual funds and pensions, who seek to maximize return for their beneficiaries. The upshot has been a set of perverse incentives for corporate managers along with negative externalities that ripple through society. More recently, however, an abundance of empirical work in finance and economics has cast serious doubt on whether investors can actively “beat the market,” especially after subtracting costs and fees. The result has been a trend toward passive, “indexed” investing, whereby investors seek to replicate an index of stocks, rather than try to beat it. Once a niche strategy, index funds are now one of the largest segments of the market, accumulating hundreds of billions of dollars in assets for this purpose. Meant to replicate the broader market, these funds have also grown to become the largest shareholders of companies in these indices. For example, six of the top ten shareholders of Apple, the world’s largest company, are now index funds. These funds cannot sell shares to exit an investment, but can use their power to vote in board members who embody a retain and reinvest ideology. By exercising this power, however, this new breed of institutional investor may inadvertently come to influence the very indices they were meant to passively track, in a sense changing the very nature of indexing - a sort of passive performativity.