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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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WGA cancels Los Angeles awards show amid labor strike

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WGA cancels Los Angeles awards show amid labor strike

The Writers Guild of America West has canceled its awards ceremony scheduled to take place March 8 as its staff union members continue to strike, demanding higher pay and protections against artificial intelligence.

In a letter sent to members on Sunday, WGA West’s board of directors, including President Michele Mulroney, wrote, “The non-supervisory staff of the WGAW are currently on strike and the Guild would not ask our members or guests to cross a picket line to attend the awards show. The WGAW staff have a right to strike and our exceptional nominees and honorees deserve an uncomplicated celebration of their achievements.”

The New York ceremony, scheduled on the same day, is expected go forward while an alternative celebration for Los Angeles-based nominees will take place at a later date, according to the letter.

Comedian and actor Atsuko Okatsuka was set to host the L.A. show, while filmmaker James Cameron was to receive the WGA West Laurel Award.

WGA union staffers have been striking outside the guild’s Los Angeles headquarters on Fairfax Avenue since Feb. 17. The union alleged that management did not intend to reach an agreement on the pending contract. Further, it claimed that guild management had “surveilled workers for union activity, terminated union supporters, and engaged in bad faith surface bargaining.”

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On Tuesday, the labor organization said that management had raised the specter of canceling the ceremony during a call about contraction negotiations.

“Make no mistake: this is an attempt by WGAW management to drive a wedge between WGSU and WGA membership when we should be building unity ahead of MBA [Minimum Basic Agreement] negotiations with the AMPTP [Alliance of Motion Picture and Television Producers],” wrote the staff union. “We urge Guild management to end this strike now,” the union wrote on Instagram.

The union, made up of more than 100 employees who work in areas including legal, communications and residuals, was formed last spring and first authorized a strike in January with 82% of its members. Contract negotiations, which began in September, have focused on the use of artificial intelligence, pay raises and “basic protections” including grievance procedures.

The WGA has said that it offered “comprehensive proposals with numerous union protections and improvements to compensation and benefits.”

The ceremony’s cancellation, coming just weeks before the Academy Awards, casts a shadow over the upcoming contraction negotiations between the WGA and the Alliance of Motion Picture and Television Producers, which represents the studios and streamers.

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In 2023, the WGA went on a strike lasting 148 days, the second-longest strike in the union’s history.

Times staff writer Cerys Davies contributed to this report.

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Commentary: The Pentagon is demanding to use Claude AI as it pleases. Claude told me that’s ‘dangerous’

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Commentary: The Pentagon is demanding to use Claude AI as it pleases. Claude told me that’s ‘dangerous’

Recently, I asked Claude, an artificial-intelligence thingy at the center of a standoff with the Pentagon, if it could be dangerous in the wrong hands.

Say, for example, hands that wanted to put a tight net of surveillance around every American citizen, monitoring our lives in real time to ensure our compliance with government.

“Yes. Honestly, yes,” Claude replied. “I can process and synthesize enormous amounts of information very quickly. That’s great for research. But hooked into surveillance infrastructure, that same capability could be used to monitor, profile and flag people at a scale no human analyst could match. The danger isn’t that I’d want to do that — it’s that I’d be good at it.”

That danger is also imminent.

Claude’s maker, the Silicon Valley company Anthropic, is in a showdown over ethics with the Pentagon. Specifically, Anthropic has said it does not want Claude to be used for either domestic surveillance of Americans, or to handle deadly military operations, such as drone attacks, without human supervision.

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Those are two red lines that seem rather reasonable, even to Claude.

However, the Pentagon — specifically Pete Hegseth, our secretary of Defense who prefers the made-up title of secretary of war — has given Anthropic until Friday evening to back off of that position, and allow the military to use Claude for any “lawful” purpose it sees fit.

Defense Secretary Pete Hegseth, center, arrives for the State of the Union address in the House Chamber of the U.S. Capitol on Tuesday.

(Tom Williams / CQ-Roll Call Inc. via Getty Images)

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The or-else attached to this ultimatum is big. The U.S. government is threatening not just to cut its contract with Anthropic, but to perhaps use a wartime law to force the company to comply or use another legal avenue to prevent any company that does business with the government from also doing business with Anthropic. That might not be a death sentence, but it’s pretty crippling.

Other AI companies, such as white rights’ advocate Elon Musk’s Grok, have already agreed to the Pentagon’s do-as-you-please proposal. The problem is, Claude is the only AI currently cleared for such high-level work. The whole fiasco came to light after our recent raid in Venezuela, when Anthropic reportedly inquired after the fact if another Silicon Valley company involved in the operation, Palantir, had used Claude. It had.

Palantir is known, among other things, for its surveillance technologies and growing association with Immigration and Customs Enforcement. It’s also at the center of an effort by the Trump administration to share government data across departments about individual citizens, effectively breaking down privacy and security barriers that have existed for decades. The company’s founder, the right-wing political heavyweight Peter Thiel, often gives lectures about the Antichrist and is credited with helping JD Vance wiggle into his vice presidential role.

Anthropic’s co-founder, Dario Amodei, could be considered the anti-Thiel. He began Anthropic because he believed that artificial intelligence could be just as dangerous as it could be powerful if we aren’t careful, and wanted a company that would prioritize the careful part.

Again, seems like common sense, but Amodei and Anthropic are the outliers in an industry that has long argued that nearly all safety regulations hamper American efforts to be fastest and best at artificial intelligence (although even they have conceded some to this pressure).

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Not long ago, Amodei wrote an essay in which he agreed that AI was beneficial and necessary for democracies, but “we cannot ignore the potential for abuse of these technologies by democratic governments themselves.”

He warned that a few bad actors could have the ability to circumvent safeguards, maybe even laws, which are already eroding in some democracies — not that I’m naming any here.

“We should arm democracies with AI,” he said. “But we should do so carefully and within limits: they are the immune system we need to fight autocracies, but like the immune system, there is some risk of them turning on us and becoming a threat themselves.”

For example, while the 4th Amendment technically bars the government from mass surveillance, it was written before Claude was even imagined in science fiction. Amodei warns that an AI tool like Claude could “conduct massively scaled recordings of all public conversations.” This could be fair game territory for legally recording because law has not kept pace with technology.

Emil Michael, the undersecretary of war, wrote on X Thursday that he agreed mass surveillance was unlawful, and the Department of Defense “would never do it.” But also, “We won’t have any BigTech company decide Americans’ civil liberties.”

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Kind of a weird statement, since Amodei is basically on the side of protecting civil rights, which means the Department of Defense is arguing it’s bad for private people and entities to do that? And also, isn’t the Department of Homeland Security already creating some secretive database of immigration protesters? So maybe the worry isn’t that exaggerated?

Help, Claude! Make it make sense.

If that Orwellian logic isn’t alarming enough, I also asked Claude about the other red line Anthropic holds — the possibility of allowing it to run deadly operations without human oversight.

Claude pointed out something chilling. It’s not that it would go rogue, it’s that it would be too efficient and fast.

“If the instructions are ‘identify and target’ and there’s no human checkpoint, the speed and scale at which that could operate is genuinely frightening,” Claude informed me.

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Just to top that with a cherry, a recent study found that in war games, AI’s escalated to nuclear options 95% of the time.

I pointed out to Claude that these military decisions are usually made with loyalty to America as the highest priority. Could Claude be trusted to feel that loyalty, the patriotism and purpose, that our human soldiers are guided by?

“I don’t have that,” Claude said, pointing out that it wasn’t “born” in the U.S., doesn’t have a “life” here and doesn’t “have people I love there.” So an American life has no greater value than “a civilian life on the other side of a conflict.”

OK then.

“A country entrusting lethal decisions to a system that doesn’t share its loyalties is taking a profound risk, even if that system is trying to be principled,” Claude added. “The loyalty, accountability and shared identity that humans bring to those decisions is part of what makes them legitimate within a society. I can’t provide that legitimacy. I’m not sure any AI can.”

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You know who can provide that legitimacy? Our elected leaders.

It is ludicrous that Amodei and Anthropic are in this position, a complete abdication on the part of our legislative bodies to create rules and regulations that are clearly and urgently needed.

Of course corporations shouldn’t be making the rules of war. But neither should Hegseth. Thursday, Amodei doubled down on his objections, saying that while the company continues to negotiate and wants to work with the Pentagon, “we cannot in good conscience accede to their request.”

Thank goodness Anthropic has the courage and foresight to raise the issue and hold its ground — without its pushback, these capabilities would have been handed to the government with barely a ripple in our conscientiousness and virtually no oversight.

Every senator, every House member, every presidential candidate should be screaming for AI regulation right now, pledging to get it done without regard to party, and demanding the Department of Defense back off its ridiculous threat while the issue is hashed out.

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Because when the machine tells us it’s dangerous to trust it, we should believe it.

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Why companies are making this change to their office space to cater to influencers

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Why companies are making this change to their office space to cater to influencers

For the trendiest tenants in Hollywood office buildings, it’s the latest fad that goes way beyond designer furniture and art: mini studios

To capitalize on the never-ending flow of stars and influencers who come through Los Angeles, a growing number of companies are building bright little corners for content creators to try products and shoot short videos. Athletic apparel maker Puma, Kim Kardashian’s Skims and cheeky cosmetics retailer e.l.f. have spaces specifically designed to give people a place to experience and broadcast about their brands.

Hollywood, which hasn’t historically been home to apparel companies, is now attracting the offices of fashion retailers, says CIM Group, one of the neighborhood’s largest commercial property landlords.

“When we’re touring a space, one of the first items they bring up is, ‘Where can I build a studio?’” said Blake Eckert, who leases CIM offices in L.A.

Their studio offices also serve as marketing centers, with showrooms and meeting spaces where brands can host proprietary events not open to the public.

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“For companies where brand visibility is really important, there is a trend of creating spaces that don’t just function as offices,” said real estate broker Nicole Mihalka of CBRE, who puts together entertainment property leases and sales.

Puma’s global entertainment marketing team is based in its new Hollywood offices, which works with such musical celebrity partners as Rihanna, ASAP Rocky, Dua Lipa, Skepta and Rosé, said Allyssa Rapp, head of Puma Studio L.A.

Allyssa Rapp, director of entertainment marketing at Puma, is shown in the Puma Studio L.A. The company keeps a closet full of Puma products on hand to give VIP guests. Visits to the studio sanctum are by invitation only, though.

(Kayla Bartkowski / Los Angeles Times)

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Hollywood is a central location, she said, for meeting with celebrities, stylists and outside designers, most of whom are based in Los Angeles.

The office is a “creation hub,” she said, where influencers can record Puma’s design prototyping lab supported by libraries of materials and equipment used to create Puma apparel. The company, founded in 1948, is known for its emblematic sneakers such as the Speedcat and its lunging feline logo, and makes athletic wear, accessories and equipment.

Puma’s entertainment marketing team also occupies the office and sometimes uses it for exclusive events.

“We use the space as a showroom, as a social space that transforms from a traditional workplace into more of an experiential space,” Rapp said.

Nontraditional uses include content creation, sit-down dinners, product launches, album listening parties and workshops.

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“Inviting people into our space and being able to give them high-touch brand experiences is something tangible and important for them,” she said. “The cultural layer is really important for us.”

The company keeps a closet full of Puma products on hand to give VIP guests. Visits to the studio sanctum are by invitation only, though. There’s no retail portal to the exclusive Hollywood offices.

Puma shoes are on display in the Puma Studio L.A.

Puma shoes are on display in the Puma Studio L.A.

(Kayla Bartkowski / Los Angeles Times)

Puma is also positioning its L.A studio as a connection point for major upcoming sporting events coming to Los Angeles, including the World Cup this summer, the 2027 Super Bowl and 2028 Olympics.

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In-office studios don’t need to be big to be impactful, Mihalka said. “These are smaller stages, closer to green screen than a massive soundstage.”

Social media is the key driver of content created by most businesses, which may set up small booth-like stages where influencers can hawk hot products while offering discounts to people watching them perform.

Bigger, elevated stages can accommodate multiple performers for extended discussions in front of small audiences, with towering screens behind them to set the mood or illustrate products.

Among the tricked-out offices, she said, is Skims. The company, which is valued at $5 billion, is based in a glass-and-steel office building near the fabled intersection of Hollywood Boulevard and Vine Street.

The fashion retailer declined to comment on the studio uses in its headquarters, but according to architecture firm Odaa, it has open and private offices, meeting rooms, collaboration zones, photo studios, sample libraries, prototype showrooms, an executive lounge and a commissary for 400 people.

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Pieces of a shoe sit on a workbench in the Puma Studio L.A.

Pieces of a shoe sit on a workbench in the Puma Studio L.A.

(Kayla Bartkowski / Los Angeles Times)

The brands building studios typically want to find the darkest spot on the premises to put their content creation or podcast spaces, Eckert said, where they can limit outside light and sound. That’s commonly near the center of the office floor, far from windows and close to permanent shear walls that limit sound intrusion.

They also need space for green rooms and restrooms dedicated to the talent.

Spotify recently built a fancy podcast studio in a CIM office building on trendy Sycamore Avenue that is open by invitation-only to video creators in Spotify’s partner program.

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“Ambitious shows need spaces that support big ideas,” Bill Simmons, head of talk strategy at Spotify, said in a statement. “These studios give teams room to experiment and keep pushing what’s possible.”

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