Charlie Munger expects index funds to change the world – and not in a good way

Warren Buffett’s business partner Charlie Munger says passive funds like those run by BlackRock wield too much power.

Berkshire Hathaway chairman Warren Buffett, left, and vice chairman Charlie Munger at the annual Berkshire shareholder shopping day in Omaha, Nebraska. Picture: Scott Morgan/Reuters

Charlie Munger doesn’t think Larry Fink should be running the world.

Mr Munger, the billionaire vice chairman of Berkshire Hathaway and Warren Buffett’s long-time business partner, said the rise of index funds like those run by Mr Fink’s BlackRock has resulted in an “enormous transfer” of the power to sway corporate decision-making. That shift will “change the world,” he said, and not for the better.

“We have a new bunch of emperors, and they’re the people who vote the shares in the index funds,” Mr Munger, 98 years old, said at the annual meeting of Daily Journal, a publishing company he has chaired since the 1970s.

“I think the world of Larry Fink, but I’m not sure I want him to be my emperor.” BlackRock and Vanguard are two of the biggest managers of passive investment funds, which track indexes instead of trying to beat the market by picking specific stocks.

The funds have become the default investing option for small investors and large pension funds alike, delivering better returns than many active funds during the market’s decadelong rally. The shift has boosted passive funds’ share of the total ownership base – and corresponding voting power – at many public companies.

The surging popularity of index funds has made their managers the biggest investors in most large stocks. The firms, including BlackRock, have sought to wield that power in ways that have at times made corporate executives uncomfortable. Investment managers have had more sway over important company decisions, including takeovers, the fates of executives and plans for long-term sustainability.

Mr Fink is an advocate of stakeholder capitalism, the idea that companies have societal obligations that extend beyond maximising value for shareholders.

“Capitalism has the power to shape society and act as a powerful catalyst for change,” Mr Fink said in his annual letter to shareholders last month.

Mr Fink has said the company is committed to a future where all investors have the option to vote their shares. BlackRock in October began allowing certain institutional investors to cast votes tied to their holdings.

BlackRock reported assets under management of more than $US10 ($13.86) trillion in the fourth quarter of 2021, a record high. Passive funds manage more than two-thirds of those assets.

The Wall Street Journal