I encountered a statistic that’s pretty startling is true in a post on “decarbonization” of all things at RealClearEnergy by Rupert Darwall:
In his epochal book “Capitalism, Socialism and Democracy,†Joseph Schumpeter described publicly traded corporations as capitalism’s vulnerable fortresses. This is truer now than when Schumpeter was writing in the 1940s, with huge, politically controlled state and municipal pension funds. The Big Three index funds of Vanguard, BlackRock, and State Street now hold 43% of the fund industry’s U.S. equity assets, which own individual stocks and vote their proxies not out of choice or conviction but because they’re in the index.
The emphasis is mine. Is that right? That sounds like too much consolidation to me.
There’s a whole bunch of related issues.
The big 3 index fund providers concentration of money is an issue for the governance of public companies.
The index providers (i.e. the ones that create the indexes that the index funds mimic) is also highly concentrated, by S&P Global (S&P 500, Dow Jones), MSCI, and FTSE Russell (Russell 2000).
The index providers in many ways define the investible universe in equities. The indexes have become so large they are distorting valuations in the stock market, e.g. Tesla’s parabolic rise when it was included in the S&P 500.
It is going to be difficult to break the oligopoly of index fund provider and index providers. The liquidity and cost advantages to being dominant in both categories are huge.
“That sounds like too much consolidation to me.”
You bet it is. Curious makes excellent points about defining the universe. And also about governance. That last one is a general point, but in addition there is a narrower point: have you ever asked yourself how and why large publicly traded corporations suddenly became “woke” even though it has been detrimental to (some of) their shareholders interests? Fear of the woke institutional investors.
Carrying on where Drew left off, here’s another statistic to reflect on. CAlPERS (the California Public Employee Retirement System) is bigger than all but 8 sovereign wealth funds. Norway, China’s two big funds, UAE, Saudi, Kuwait, Hong Kong, Singapore. And that’s just CalPERS. Start adding up the other public employee retirement systems and you’re starting to talk about real money.
It does help to put relative size in order.
As of Jan,
– Calpers has 444 billion in assets under management.
– Blackrock has 8.68 trillion in assets under management.
– Vanguard has 7.1 trillion in assets under management.
– 11+ trillion dollars are invested in S&P 500 index funds from various providers.
– The combined market cap of all S&P 500 companies is 31 trillion dollars.
From that angle, the influence Calpers has on public companies is little compared to Blackrock/Vanguard or S&P.
Blackrock/Vanguard typically hold 15+% of shares in almost all public companies, while Calpers is around 1%. They typically hold enough shares to get their way on any proxy votes; whether for or against management wishes.
The S&P 500 index is the determinant of approximately 30% shareholdings for its constituent companies.
No argument here, CuriousOnlooker. The reason I brought up CalPERS is that it’s a government fund and more strongly predisposed to operate politically. If the federal government were to have $500 billion or multi-trillion wealth fund, the screams would be heard in ReykjavÃk. But the large funds of state and local governments go largely ignored.
The big 3 also have a lot of international assets. Is there evidence they are less political. Black Rock ended up being hired by the Fed for its bond buying program. Have to agree with Drew that the biggest risk of having 3 companies having such influence on the economy is that people might talk about racism.
https://www.thinkadvisor.com/2020/11/30/group-aims-to-limit-power-of-blackrock-vanguard-state-street/
Steve
Just for comparison the total value of the world’s largest 100 retirement funds is valued at a bit over $18 trillion, assuming this group is correct.
https://www.swfinstitute.org/fund-rankings/public-pension
Steve
Monopoly power is always bad.
Sorry if I don’t share Steve’s sarcastic view that racism is underrepresented in public discourse.
Only the racists are obsessed.
I have no objection to racism being called out as an issue. I do have an objection to breast-beating about past racism and raking up old scores which I believe does little other than to raise consciousness about race. I think the open question is what role racism plays in incidents like the killing of George Floyd. I think it probably plays more of a role than it should but not as great a role as those who’ve had their consciousnesses raised about race would have it.
I dont share that view either. You and the other conservative bring it up all the time. It’s an obsession.
Steve
I’m not a conservative. I am provably moderate/eclectic.
I just read Jamie Dimon advising that J.P. Morgan Chase, (a…bank?) is holding back, (not lending, not investing), 1/2 of a trillion dollars in anticipation of better rates down the road.
Banks as I understand are federally regulated for the public good, or are they?
I’m trying to imagine any other type of business, manufacturer, retailer, what have you, holding back that kind of inventory in hopes of better margins a few months from now. They’d go broke.
Not aimed at you Dave.
Steve