Andrew Allentuck

Friday, April 27, 2001

Unseen Power: How Mutual Funds Threaten the Political and Economic Wealth of Nations
by Adam Harmes
Stoddart, 262 pages

Political scientist Adam Harmes presents a conspiracy theory that makes mutual fund portfolio managers into ogres of evil. "The rise of mutual funds has served to vastly increase the power of Wall Street over Main Street in ways that are not always in the interests of the average person," he writes. His case is that, since fund managers move money to achieve short term goals, they destabilize the economy, substitute short for long term economic gains, and force firms to substitute shareholder interests for worker interests.

Unseen Power is a denial that capital markets work for the widespread good. A pun on Adam Smith's invisible hand that distributes social benefits from individual gains, it is a denial that public investments run by professional managers create broad good.

That's a lot of guilt to pile onto the shoulders of the managers of the 4,500 mutual funds in Canada, the 12,000 or so in the U.S. and the tens of thousands more around the world. Mr. Harmes might be right if they all operated as a single herd, but, sad to say for his argument, they don't. The stock one fund covets is often shunned by another. Bear funds are managed to take advantage of market drops, hedge funds will short stocks and put downward pressure on the prices of stocks that are rising rapidly. There is no consistency and no master plan that can be cited to justify Mr. Harmes' belief that portfolio managers run or plot together.

Then there is the matter of corporate democracy. Large pension funds and even some large mutual funds are more and more voting their shares for the advantage of their beneficiaries and unitholders. That gives countervailing power against corporate managers who might otherwise take too much of the corporate pot for themselves. As to the case for workers against unitholders, it's weak. Workers are unitholders, even though some unionists would like them not to be.

In the end, this book argues the old case that, because of a pebble, a horse tripped. The rider was lost, his message never got through, the battle was lost and the war was forfeit. All for a pebble. On this slender framework, Mr. Harmes builds a case for a state-operated reporting system of mutual fund results and regulation of risks taken by hedge funds. One remarkable recommendation is "to restrict fund rating companies to only evaluating performance based on long-term criteria." How unitholders would trade their accounts on such things as whether a fund's companies have achieved environmental targets is unclear. It would not maximize individual pension plan growth.

Unseen Power is interesting as an attack on mutual fund management. Author Harmes has no trust for the market and his recommendations, if turned into policy, would wreck much of the wealth that mutual funds and pension funds have created. But if you want to know what social critics think of the process of wealth creation by institutional investors, read the book