The 'Big Three'

The chorus of concerns around common ownership have grown louder and louder in 2022. From Berkshire Hathaway’s Charlie Munger to Elon Musk, heavyweights across finance have expressed doubts over the growing power of the ‘Big Three’ – BlackRock, Vanguard and State Street Global Advisors (SSGA) – in particular, and their stranglehold over corporate America. 

The dramatic rise of ETFs, and passives more broadly, over the past two decades has led to billions of dollars of savings for investors and should be viewed as one of the greatest innovations in modern finance.

However, the growing authority of a handful of players risks destabilising this rise. Passive power is a concern that has genuine merit. 

Stifling competition?

The ‘Big Three’ hold significant control over every major company in the US, and because the ETF industry is a scale game, this only looks set to increase as assets continue to pour in over the next decade.

Highlighting this, the trio own on average 18.7% of every company in the S&P 500, as at the end of 2021, according to data from Lazard. This increases to 22.8% for companies in the S&P 400 and 28.2% for the S&P 600.

Furthermore, the ‘Big Three’ comprised just 5% of ownership of all US-listed large companies in 1998. This jumped to roughly 20% in 2019 and is forecasted to hit 33% within the next decade, according to Harvard Law School’ Lucian Bebchuk and Boston University’s Scott Hirst. 

But why is common ownership potentially so negative for the US economy? The answer lies in the anti-competition risks a market dominated by common ownership brings.

A 2014 paper, titled Anticompetitive Effects Of Common Ownership, looked into the effects of competing firms having the same asset managers as major shareholders. 

“A long theoretical literature in industrial organisation predicts that partial common ownership of natural competitors by overlapping sets of investors can reduce firms’ incentives to compete: the benefits to one firm of competing aggressively – for example, gains in market share – come at the expense of firms that are part of the same investors’ portfolio, reducing total portfolio value,” the paper said. 

“Theory therefore predicts that common ownership can push product markets toward monopolistic outcomes, and imply a deadweight loss for the economy and adverse consequences for consumers.”

Voting rights

In response to growing concerns, the ‘Big Three’ have all taken steps to divulge voting powers to institutional investors.

In October 2021, BlackRock announced investors in 40% of its equity index assets would be able to vote at shareholder meetings. This was extended to $2.3trn of its $4.9trn index equity assets in June 2022.

The move shows BlackRock is acutely aware that the rise of indexing is leaving control of the US economy in the hands of the ‘Big Three’.

By handing voting rights to investors instead of retaining them itself, BlackRock will no longer be beholden to concerns it may vote favourably towards company management that is not in the best interests of consumers and the wider economy.  

However, it does not mean the problem is going away anytime soon and the warnings continue to be stark. 

In a paper titled The Problem of Twelve, Harvard Law School’s John Coates, said: “The agents of index fund providers pose one of the biggest new challenges for the future of corporate governance.

Unless the law changes, the effect of indexation will be to turn the concept of ‘passive’ investing on its head and produce the greatest concentration of economic control in our lifetimes.”