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Column: Investing through index funds is more popular than ever, so why is it becoming controversial?

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Column: Investing through index funds is more popular than ever, so why is it becoming controversial?

The share of adult Americans who own stocks is approaching an all-time high of 63%, which may explain why events such as the surge in “meme” stocks like GameStop gets such generous play in the news.

But it doesn’t explain why the investment vehicles that dominate Americans’ portfolios — passive mutual funds tied to market indexes such as the Standard & Poor’s 500 — have traditionally drawn so much less interest in the news media.

That may be changing, thanks to concerns about index funds expressed across the partisan spectrum. To put these concerns simply, Democrats and progressives are uneasy about the concentration of investment power in the hands of a few fund management firms that vacuum the vast bulk of investment dollars into their index funds, notably BlackRock, Vanguard and State Street.

Control of most public companies…will soon be concentrated in the hands of a dozen or fewer people.

— John C. Coates, Harvard Law School (2018)

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Republicans and conservatives also fret about the concentration of power, but their concern is more specific — they complain that the passive fund managers deploying $15 trillion in assets globally are surreptitiously pushing a liberal agenda on corporate managements, especially in “ESG” categories, the environment, social issues and corporate governance.

That was the claim of 21 red state attorneys general, who groused last year in letters to the big asset management firms that they appeared to be pressing managers of their portfolio companies to act against global warming (as though that’s a bad thing).

More on that in a bit. First, a primer on passive investing and why it attracts so much money.

As so many investors have learned from bitter experience, trying to pick individual winners in the stock market is a mug’s game.

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Doing the financial analysis necessary to judge the potential gains of individual stocks is a full-time job, and most people already have full-time jobs. Few have the financial resources to brave the periodic downdrafts in the stock market without quailing. (As J.P. Morgan supposedly advised a friend who said he was so worried about his portfolio that he couldn’t sleep at night, “Then sell down to your sleeping point.”)

Enter the index mutual fund. Jack Bogle of Vanguard launched the first such fund to be widely marketed to retail investors in 1975. It was designed to match the performance of the S&P 500 simply by replicating its holdings and their weighting in the index. It was, in short, a way for the average investor to ride the ups and downs of the stock market effortlessly.

Index funds have several virtues. Because the makeup of the 500 index changes only rarely, the 500 fund and funds like it make few purchases or sales. That reduces transaction costs, which allowed Bogle to keep fees low. They’re also tax-friendly — because they don’t have to sell stocks very often, they incur minimal capital gains taxes, which would be passed through to its investors.

The Vanguard 500 fund, along with other index funds, exposed the dirty little secret of the brokerage industry: “Active” fund managers, who bought and sold vigorously to dump losing stocks and ride winners, seldom did better than the broad market.

Over the last year, only about 40% of actively managed large-company funds did better than the S&P 500 index, according to S&P’s SPIVA scorecard (for “S&P Indices Versus Active”). Over the last 10 years, only about 12.6% of large-cap funds beat the S&P 500.

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It’s true that a stock-picker here or there will have a successful run, but rarely for more than a few years. The most famous, Peter Lynch of Fidelity Investments, had a gilt-edged run from 1977 to 1990, during which he built Fidelity’s Magellan Fund from $18 million in assets to $14 billion. In that time span Magellan averaged an annual return of 29%, possibly the most successful such run ever.

But Lynch had some advantages that are rarely noted: For the first four years of his management, Magellan was a private investment fund for Fidelity’s founding Johnson family; it wasn’t opened to outsiders until 1981. For years after that it was relatively small, which is almost always an advantage for fund managers.

By the end of Lynch’s tenure Magellan was a behemoth struggling to eke out “a razor thin margin of victory,” as an investment expert put it. Magellan actually fell behind the S&P 500 in two of Lynch’s final four years of management.

That’s not unusual. Fewer than 5% of all actively managed funds remain in the top half of funds by performance for even five years.

So it’s not surprising that passively managed index funds have outrun active funds for years. Finally, as of the end of December according to Morningstar, assets in passive investments including mutual funds and exchange-trade funds exceeded those in active investments, $13.29 trillion vs. $13.23 trillion. That gap is destined to widen.

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But that success has generated a backlash. The issue boils down to whether there can be too much passive investing and if so, how much is too much.

What unnerves some market experts is that passive investors by their nature don’t care what they’re buying — in fact, they usually don’t even know. (How many owners of Vanguard’s S&P 500 index fund can name even 10 stocks in the index?) That relieves them of the chore, even the duty, of making judgments about a company’s future, its competitive behavior, its prospects.

A 2014 academic paper suggested that, because index fund investors are likely to own all the major competitors in a given industry (because all are in the S&P 500), aggressive competing by one will reduce the value of the others, possibly lowering the value of the index.

So pressure on corporate managers to increase market share evaporates, and the industry begins to resemble a monopoly, which produces a “loss for the economy and adverse consequences for consumers.”

A related drawback comes from the dominance of the passive asset business by a small number of huge brokerage firms. This is what legal expert John C. Coates of Harvard Law School called “the problem of twelve” — that “control of most public companies … will soon be concentrated in the hands of a dozen or fewer people,” namely, the top managers of the biggest passive investment firms.

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They, not individual investors, will decide what corporate policies should be, and they’ll have access to trillions of dollars in assets belonging to billions of uncaring investors to make their own views heard.

That’s the prospect that had the red-state attorneys general vibrating.

“You are not the same as political or social activists,” they wrote, “and you should not be allowing the vast savings entrusted to you to be commandeered by activists to advance non-financial goals.” Among those goals, they wrote, is changing corporate behavior “so that it aligns with the Environmental, Social, and Governance (ESG) goal of achieving net zero by 2050.” (That is, achieving neutral impact on global warming by that year.)

There are a couple of problems with the red-staters’ argument. For one thing, there’s no evidence that ESG policies are necessarily at odds with the goals of the average investor, who may indeed favor increasing diversity and fighting the threat of global warming. Some investors may indeed see the improvement of social and environmental conditions as a responsibility of corporate managements.

Another problem is that defining racism and global warning as “non-financial” problems is a crabbed, highly partisan and erroneous viewpoint. A company that allows racial discrimination to reign on its factory floors is asking for regulatory problems and for a loss of customers. There are precious few businesses that will be immune from the costs of global warming, which could force them to close or relocate plants or deplete their profits.

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The authors of that threatening letter are performing for what may be a very narrow and shrinking voting base. They’re the ones who may be pushing “non-financial” policies on corporations; they’re just too blind to see the possible costs of the status quo. They’re backed by right-wing organizations.

That said, the concentration of financial power in passive investment funds has raised concerns in Washington, and not only among conservatives. In April, the board of the Federal Deposit Insurance Corp., a major federal bank regulator, began pondering whether the biggest index fund firms may own enough shares in banks to exercise unwelcome policy control.

Members of the FDIC board — Republican Jonathan McKernan and Democrat Rohit Chopra — met jointly with executives from BlackRock and Vanguard to get a better sense of their bank holdings, the Wall Street Journal reported.

Nothing has come of those meetings as yet, but the big passive investment firms have taken steps to give their investment customers more say in how their shares are voted on shareholder proposals at corporate annual meetings.

Up to now, the firms have done the voting of what may be sizable holdings in stocks in individual companies, often following the lead of proxy advisory services such as Glass, Lewis & Co. or Institutional Shareholder Services. Starting in 2022, BlackRock afforded clients in some of its funds to make their own voting decisions.

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The firm says that by the end of last year, investors in funds valued at $2.6 trillion of its $5.2 trillion in equity index funds were eligible to participate in what it calls Voting Choice; clients with $598 billion in holdings in those funds participated.

Vanguard introduced a pilot program along the same lines last year and expanded it this year. Investors in five of its equity index funds can choose from among four approaches: casting votes consistent with a portfolio company management’s recommendations; voting along with the ESG recommendations of Glass Lewis; leaving their vote up to Vanguard; or not casting a vote at all.

Whether that will quell the backlash against concentrated passive investing isn’t clear just yet. It may energize more investors to pay attention to the companies in their index funds. Or, given that retail investors are known not to bother voting on shareholder resolutions, it could even strengthen the hand of the big firms in seeking to guide policy of indexed corporations.

The only thing that everyone seems to agree on is that passive investing does better than active management — at the moment. Whether or when that tide will turn … who knows?

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Waymo reports teen riders for bad behavior and delivers them to the police

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Waymo reports teen riders for bad behavior and delivers them to the police

Robotaxis could be turning into robocops.

A self-driving Waymo reported two teens to San Mateo, Calif., police on Monday after they were found drinking alcohol and shooting toy guns in the back of the vehicle.

According to a social media post from the San Mateo Police Department, officers detained two 15-year-olds after the Waymo they were riding in contacted the department and stopped in a parking lot until law enforcement arrived.

“Parents do you know where your teens are?” the San Mateo Police Department wrote on Facebook following the incident. “Waymo does!”

Officers removed both teens from the vehicle and determined they were using toy guns to shoot Orbeez out the windows. Orbeez are small, water-absorbing beads sold at toy stores.

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“Toy guns, water guns, and BB guns all pose real dangers, especially to an untrained eye,” the Police Department said. “The simple handling of them can cause fear in [passersby].” “

A video posted on Facebook shows at least five officers and a police dog responding to the scene and approaching the Waymo with their weapons raised.

Waymo did not immediately respond to a request for comment.

Waymo vehicles have internal cameras and microphones that may be used in an emergency or to “promote safety and security,” according to Waymo’s online support page.

The cameras are also used to ensure the vehicles are clean and to help find lost items, according to the support page.

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The company said it does not use facial recognition or other biometric identification technologies to identify individuals.

“In more urgent circumstances, support may access live video during a trip,” the Waymo page said.

The San Mateo Police Department’s Facebook post has garnered nearly 60 comments, with one user accusing Waymo of “snitching.”

“At least they got a designated driver?!” one user commented.

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Commentary: How right-wing anti-transgender attacks led to a Supreme Court ruling upholding sex discrimination

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Commentary: How right-wing anti-transgender attacks led to a Supreme Court ruling upholding sex discrimination

At the Supreme Court, the unfounded fear of boys masquerading as girls in youth sports rolled the clock back on gender equality.

On the surface, the Supreme Court’s June 30 opinion upholding state laws barring transgender girls from women’s and girl’s sports teams looks like a victory for women’s rights.

The 6-3 opinion by Justice Brett M. Kavanaugh certainly presents itself that way. “Females and males have inherent physical differences relevant to athletic performance,” Kavanaugh wrote. “Therefore, in contact sports, forcing female athletes to compete against males can create significant safety risks.” He also asserted that “forcing female athletes to compete against males can undermine competitive fairness.”

The ruling applied to prohibitions enacted in Idaho and West Virginia against “biological” males’ participation on women’s teams in public schools. Federal judges in both states overturned the bans. The Supreme Court majority restored them. The ruling essentially upholds similar bans enacted in 25 other states.

There was no record of any transgender person participating in school sports in the State, let alone any ‘problem’ with transgender students … creating unfair competition or unsafe conditions.

— Justice Sonia Sotomayor, demolishing the Supreme Court’s argument in favor of banning transgender girls from girl’s sports

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Kavanaugh, like Donald Trump and others in the anti-transgender camp, maintained that one’s gender is an immutable fact of life, established even before birth.

Anything else, Trump stated in an executive order he issued on inauguration day 2025, could only be the product of “gender ideology extremism.” The U.S., his order stated, recognizes “two sexes, male and female. These sexes are not changeable and are grounded in fundamental and incontrovertible reality.” That’s a “biological truth,” he declared.

In his own version of this overconfident and factually insupportable conclusion, Kavanaugh wrote: “As all agree, females and males have inherent physical differences relevant to athletic performance.”

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Science recognizes that some people are “born with sex traits that don’t fit into typical male or female patterns,” to cite a discussion on the Cleveland Clinic web page on the topic “intersex.” The condition “may involve chromosomes, hormones, reproductive organs or genitals.”

From a psychological standpoint, medical science recognizes “gender dysphoria” as a real condition often requiring counseling and medical intervention such as the use of puberty blockers and hormones to stave off the development of secondary sex characteristics until the condition can be resolved.

No one disputes that there are physical differences between the sexes. Few would dispute that on average or even at the median, males may be bigger and more powerful than females, or that in certain contact sports the difference may be telling and on occasion dangerous.

But that’s not the same as asserting that the physical differences between males and females invariably mean that men will invariably prevail over women in all competitions or that their participation will endanger women.

The International Olympic Committee — in a policy statement Kavanaugh cited incompletely — says that in “most running and swimming events,” males have a 10% to 12% advantage over women. That’s a range that would accommodate the full spectrum of outcomes — transgender females win, cisfemales win, they tie. (The “cis” prefix denotes those living consistent with their birth gender.)

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West Virginia and Idaho addressed this ambiguity by banning transgender women from all girls’ teams. So under their rules transgender girls can’t play football or soccer with cisgirls. But what’s the argument in favor of banning them from the 100-yard dash, or cross-country track, or diving, or archery?

But something else is going on here. The Supreme Court’s ruling was almost preordained, given the years-long campaign by conservatives to demonize transgender individuals as if they’re members of an alien species.

It will be recalled that during his presidential campaign, Trump spun a despicable fantasy in which children were kidnapped in school and secretly subjected to sex-change operations.

Trump’s executive order wiped out policies aimed at protecting transgender adults from discrimination. He moved to outlaw gender-affirming medical therapies for anyone under 19 by cutting off federal funding for healthcare institutions that provide such care.

He banned transgender individuals from serving in the military and ordered federal prison officials to move transgender inmates into the general populations consistent with their birth genders, which exposes them to physical assault. (Federal Judge Royce Lamberth of Washington, D.C., has blocked the government from transferring three transgender women into the male prison population or terminating their hormone treatments.)

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I wrote during Trump’s first term, when his anti-transgender policies were still gestating, that the goal was to show that “one can target any community, as long as it doesn’t have a strong political voice or political power. These are the actions of bullies and cowards, pretending to be strong.”

Last year, the Supreme Court struck its first blow against transgender rights by upholding a Tennessee law banning transgender care, including puberty blockers and hormone therapy, for minors. Similar laws have been enacted in 25 other states. The majority in that ruling by Chief Justice John G. Roberts Jr. was identical to the one in the June 30 ruling — Roberts, Kavanaugh, and Justices Clarence Thomas, Samuel A. Alito Jr., Neil M. Gorsuch and Amy Coney Barrett.

Who are the targets of this ideological campaign? They number only about 1.6 million U.S. adults, or one-half of 1% of the U.S. population. About 300,000 adolescents ages 13 to 17, or 1.4%, identify as transgender, according to a study by UCLA School of Law.

In West Virginia, as Justice Sonia Sotomayor observed in her dissenting opinion, “there was no record of any transgender person participating in school sports in the State, let along any ‘problem’ with transgender students … creating unfair competition or unsafe conditions.”

In endorsing the flat bans directed at transgender women in Idaho and West Virginia, Kavanaugh argued that any attempt to implement case-by-case judgments of students’ requests to join sports teams inconsistent with their biological gender would create “an enormous practical and administrability problem.”

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Is that so? That wasn’t the case in Maine, where the annual K-12 population is more than 170,000. There, a committee was charged with determining whether a student’s participation in a sport consistent with their gender identity but inconsistent with their biological sex would “result in an unfair athletic advantage” or present a risk of injury to others. The committee held 56 hearings from 2013 through 2021, or an average of seven per year. During the entire time span, only four involved transgender girls. (The outcome of those hearings couldn’t be learned.)

It was Maine’s policy, one might recall, that provoked a confrontation between Trump and Maine Gov. Janet Mills at the White House last year, when Trump threatened to withhold federal funding from the state unless it barred transgender students from competing on women’s sports teams. “We’ll see you in court,” Mills snapped.

Whether the Idaho and West Virginia laws genuinely protect girls from unfair competition is questionable. (The Idaho law is styled the “Fairness in Women’s Sports Act.”) In practice, the laws may subject women in public schools to “invasive sex verification procedures,” as educational expert George Theoharis of Syracuse University wrote after the court ruling.

They’re also based on a retrograde view of women as fragile creatures needing men’s protection, Theoharis wrote — “the same logic that has historically been used to justify excluding women from making their own healthcare decisions and girls from rigorous math and science; that physically demanding work is simply beyond them.” (There don’t appear to be any state laws barring transgender women from competing in men’s sports.)

Becky Pepper-Jackson, the plaintiff in the West Virginia case, in which she is identified only as B.P.J., is the only transgender girl who sought to join girl’s teams — track and cross-country — in the state. That was in 2021, just after West Virginia passed its law and she was about to enter sixth grade. She didn’t appear to pose any competitive risk to others on the track and cross-country teams she applied to join — her lawyers told the Supreme Court that on those no-cut teams, she “came in near the back.”

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Anyway, she had not gone through male puberty, which theoretically might have endowed her with a competitive advantage, because she had been taking puberty blockers and female hormones.

Thanks to the court’s ruling, Sotomayor observed in a dissent joined by Justices Elena Kagan and Ketanji Brown Jackson, West Virginia can deny Becky access to school sports “because it thinks they have an inherent athletic advantage, even if the facts show that they do not.”

B.P.J., Sotomayor wrote, “cannot practice on girls’ teams, even if she would not take anyone’s spot in an eventual competition, even if everyone who tries out for the team makes it, and even if having the chance to participate could aid immensely in treating B. P. J.’s gender dysphoria.”

So whose interest was really protected by the Supreme Court?

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Orange County real estate investor pleads not guilty in $100 million bank fraud case

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Orange County real estate investor pleads not guilty in 0 million bank fraud case

An Orange County real estate investor accused of criminally defrauding an Arizona bank of nearly $100 million pleaded not guilty Monday and remains in custody.

Mahender Makhijani, 44, of Corona del Mar — who also was ordered by an arbitrator to pay $1.34 billion in a separate civil fraud case — was arraigned in Santa Ana federal court on two charges.

He is accused of bank fraud and making a false statement to a bank in a June 8 case involving a $100 million real estate loan made by Phoenix-based Western Alliance Bank. He was taken into custody on June 10.

Makhijani is accused of providing bogus collateral for the October 2024 loan now in default. In a civil lawsuit, Western Alliance said the outstanding balance as nearly $99 million.

Prosecutors say he falsified title insurance policies that showed the bank would have a first lien on the underlying collateral if the loan went bad, when in fact it did not.

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A trial was set for August 11 before U.S. District Judge David O. Carter in Santa Ana.

Michael Schachter, his criminal defense attorney, did not respond to messages seeking comment.

In the civil case, an arbitrator in May ordered Makhijani to pay Laguna Beach real estate mogul Mohammad Honarkar $1.34 billion after ruling he had fraudulently induced him into a 2021 joint venture — and then wrested control and lost to creditors more than two dozen properties Honarkar had owned.

Makhijani has not been criminally charged in that case, but prosecutors alleged in an affidavit in support of the bank fraud charges that he used “force and threats” in his dealings with Honarkar and others — including taking over the landmark Hotel Laguna in 2023 that Honarkar was renovating.

Prosecutors sought to hold Makhijani without bail after his arrest.

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The affidavit noted he is a legal Indian immigrant with a home and bank accounts in that country, has access to private jets and threatened to “run away” if caught in a difficult situation.

The request was denied and he was granted $500,000 bail.

However, Makhijani remains in custody after a hearing sought by prosecutors last month before Magistrate Judge Autumn Spaeth.

The judge declined to accept a $450,000 cashier’s check submitted by a Makhijani associate for the bail, finding insufficient proof the source of the funds was legitimate, according to court records.

Makhijani is not prominent outside Orange County real estate circles, but he established a thriving distressed-assets business over the last decade that attracted prominent Southern California real estate investors.

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Prosecutors said it paid for a lifestyle that included two multimillion-dollar homes in Corona del Mar, a luxury apartment in Newport Beach and various luxury vehicles.

As of last month, prosecutors had not fully traced his assets, which they believe are not held in his name and some of which may be in India.

The businessman employed an array of shell companies and strawmen to sign documents on his behalf, and to stand in for him as operators of his companies, according to the affidavit.

Makhijani told an associate he took extra precautions because wanted to insulate himself from litigation and that “they were sharks in the distressed world who took advantage of people,” the affidavit stated.

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