Thursday, November 10, 2005

Conflict of interest?

Judge Samuel Alito has come under fire recently for ruling in a case involving Vanguard mutual fund company, when he held shares of Vanguard funds. Democrats are trying to make this out as a conflict of interests. The reality is that the performance of a mutual fund is completely unrelated to the profitability of the company which manages it.

A conflict of interest is created for a judge when his personal interests will be affected by a ruling in a case. For example, if a judge owned a million dollars of Microsoft stock, ruling in a case which would significantly affect the profitability of Microsoft would be a conflict of interest. If the judge ruled in favor of Microsoft, the decision could be called into question.

Senators certainly understand the distinction between investing in a company's common stock and investing in a mutual fund managed by a fund family. They are raising this issue because they count on a large percentage of the population not understanding the distinction. Judge Alito did not invest in Vanguard stock. In fact, Vanguard is not publicly held, so there is no Vanguard stock to invest in. Judge Alito invested in mutual funds managed by Vanguard. The money is invested in the stock of hundreds or thousands of companies. The performance of his investment is determined by the performance of all these stocks. His ruling has no impact at all on the value of his investment.

Judge Alito demonstrates great financial savvy by investing in Vanguard funds. My IRA is invested in Vanguard funds because it is one of the best fund families out there, ranking near the top in fiduciary responsibility, low expenses, and breadth of investment options. An investment in the Vanguard Total Stock Market Index is perhaps the investment which is least subject to conflict of interest of any investment. This fund tracks the Wilshire 5000 index, which is essentially the entire domestic stock market. The performance of this fund is tied to the strength of the entire American economy. Because the fund owns shares in several thousand American companies, the impact on the fund of a court ruling involving any one company is negligible. What is best for the country as a whole is what produces the best investment performance. Just as we would hope, the private interests of the judge are aligned with the interests of the nation. Most public officials' investment portfolios are riskier, return less, carry higher expenses, and are more subject to conflict of interest.

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