October 28

Analysis: How Corporate Social Responsibility Can Turbocharge Index Funds

One of the biggest trends to emerge in the stock market in the last 20 years is the concentration of assets held by institutional investors such as BlackRock, State Street, and Vanguard.

If you have a 401(k) or some other employer-sponsored retirement plan, there’s a good chance it’s managed by an institutional investor, and collectively they manage trillions of dollars for individuals and organizations. As research has shown that investing in a wide range of stocks is the best way to achieve positive returns in the long term, institutional investors create index funds that hold stocks from many industries. This means that they also own stocks of numerous firms in the same industry, which makes institutional investors “common owners.” One byproduct of common ownership is systematic risk: when you own shares in multiple firms in the same industry, one firm’s misstep or scandal can taint the other firms in the industry, causing share prices to go down for all the firms in that industry, and thus magnifying the losses of the index funds that own those shares.

Photo courtesy of Lorenzo.

Source: Tuck School (link opens in a new window)

corporate social responsibility, financial inclusion