A seismic shift is going on in finance still largely unnoticed by the public. People and institutions are increasingly investing their money into index tracker funds instead of actively managed mutual funds. Index funds simply buy shares of all firms that are part of an index. Therefore, they can charge significantly lower fees to their investors — there is no well-paid fund manager that tries to beat the market. Besides low fees, they offer similar returns to active funds, as the latter have not been able to consistently beat major stock indexes, such as the S&P500. The scale of this money migration is astounding. Between 2008 and 2016, about US$1,200 billion left actively managed funds, while approximately US$1,400 billion moved into index funds.

This money migration has sharply increased the concentration of corporate ownership, and with that the possibility of a small group of firms to influence shareholder voting. While the active fund industry is fairly fragmented (large firms such as Fidelity notwithstanding), the majority of the money has gone to a new group of three US asset managers: BlackRock, Vanguard, and State Street. We have published a paper titled Hidden power of the Big Three? Passive index funds, re-concentration of corporate ownership, and new financial risk in the journal Business and Politics. In this paper, we document the rise of the ‘Big Three’ asset managers and show that they coordinate the voting behavior of all their different funds in the annual general meetings of the companies that they hold shares in. Coordinated voting is a key prerequisite for exerting influence. And their potential influence is enormous: in 2015 the Big Three, seen together, owned an average 18 percent in all firms that are part of the S&P500 (think Apple, Microsoft and AT&T, for example). This made them the largest owner in almost 90 percent of the top 500 US corporations. Our short film “Who owns big business: the rise of passive investors” explains the rise of the Big Three.

The Big Three have claimed that the retail investors who bought index funds would be the real owners of these corporations. However, BlackRock, Vanguard, and State Street exercise the voting rights attached to the shares, which makes them The New Mandate Owners that effectively exert influence over much of corporate America. This broad and deep ownership brings a lot of responsibility with it. One example are US gun makers. In Sturm Ruger, BlackRock owns 17 percent and Vanguard almost 10 percent. In American Outdoor Brands, BlackRock holds 11 percent, Vanguard owns 9 percent. Due to activist protests, BlackRock has announced to offer index funds that exclude gun makers. However, these new funds most likely will not exclude large producers of military weapons, such as Lockheed Martin, in which the Big Three together hold over 30 percent, or Raytheon where they own almost 20 percent.

The seismic shift of money into index funds continues forcefully. And higher ownership means more influence. It seems prudent that regulators, academics and the public begin a serious debate about the role of these new universal owners


We are delighted to have been awarded the inaugural Business & Politics David P Baron Prize for this article- the link for this can be found on the BAP homepage here:

https://www.cambridge.org/core/journals/business-and-politics

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