Much like the money trusts in the early 20th century that controlled substantial amounts of wealth, the biggest U.S. asset managers today pose threats to the U.S. economy and financial markets, according to a new report from the non-profit American Economic Liberties Project.
The report, “The New Money Trust: How Large Money Managers Control Our Economy and What We Can Do About It, focuses on what it calls the “Big Three” asset managers — BlackRock, Vanguard and State Street — which combined manage over $15 trillion in global assets, equivalent to more than three-quarters of U.S. GDP and more than three times the GDP of Germany.
BlackRock’s assets, for example, hold a 5% or greater stake in more than 97% of the S&P 500 companies, writes Graham Steele, author of the report and a senior fellow at the Project, a non-profit and non-partisan organization focused on challenging the dominance of monopolies “over markets and society.”
BlackRock also wields political power, as exemplified by the Federal Reserve hiring the firm this year to help manage its corporate bond buying programs, which included BlackRock ETFs, years after the firm assisted the Fed in 2009 to help address the Great Financial Crisis.
The American Economic Liberties Project report also highlights index funds, which have total assets of $11 trillion, and the biggest asset managers in that universe.
The combined assets of BlackRock, Vanguard and State Street account for about 82% of the S&P 500’s market capitalization, about 25% of shares that voted in director elections at S&P 500 companies in 2018, and 73%-80% of global ETF assets.
“The outsized footprint of a few large financial companies poses new issues for the governance of corporate America, the competitiveness of our economy, the concentration of political power, and the stability of financial markets,” writes Steele.
“The numbers are staggering: the largest 1% of asset managers control 61% of sector assets — 243 times the bottom 50% and 45 of the 50 largest ETFs,” writes Steele.
The three big fund managers “have outsized influence over the companies that their funds invest in,” according to Steele. “Their dominance is why stock buybacks have increased more rapidly for companies with a high amount of index fund ownership and why there was no shareholder engagement for close to 93% of portfolio companies from 2017 through 2019.”
Their power over “critical services … increases both their systemic importance and the influence that they have in the financial marketplace,” according to Steele.
BlackRock’s technology platform, Aladdin, for example, hosts at least $21.6 trillion in assets, which is equivalent to 10% of global stocks and bonds and is used by 12,000 investment professionals employed by BlackRock clients at 210 institutions worldwide, according to the report.
State Street’s custody business, with about $36 trillion in assets, “cannot be easily substituted by other market participants should these firms be subject to material financial distress,” according to the report. As a result of those enormous custody assets, State Street is designated as a U.S. Global Systemically Important Bank (G-SIB).
Views on Vanguard
The report doesn’t focus much on Vanguard, the only firm among the top three that is not publicly traded. It notes, though, that like BlackRock and State Street, Vanguard rarely votes against corporate compensation shareholder proxies and has representation on the Commodity Futures Trading Commission’s subcommittee on climate-related financial market risk despite criticism of its investments in fossil fuels.
Vanguard is mentioned as much for the sentiment of its founder John Bogle, who in 2018, broadcast his concerns that “ a handful of giant institutional investors will one day hold voting control of virtually every large U.S. corporation and their “growing dominance” on financial markets, corporate governance, and regulation will be “major issues in the coming era.”
Steele agrees with Bogle and concludes his report calling for structural reform to limit the power of the big three beyond current regulations. Rules that prohibit investment companies from owning more than 10% of any portfolio company should apply to fund families rather than to individual funds, as they do now, for example.
But “better regulation alone will not work,” according to the report. “The risks posed by the modern asset management industry require an approach that combines structural reforms and better regulation,” implying the need for legislation to accomplish those structural reforms though that isn’t expanded on.
Asset Managers’ Respond
Not surprisingly all three asset managers that were the focus of the report objected to its findings especially its call for more regulation, which they all said would harm investors who have benefited from low-cost index funds.
“Index funds provide efficient, low-cost investment access to millions of individual investors who use these investments to fund their retirements and achieve other personal financial goals,” said a State Street spokeswoman, expressing a sentiment that BlackRock and Vanguard spokespeople also shared.
Blackrock said the report “ contains multiple factual inaccuracies and misconceptions about BlackRock, the asset management industry, investment stewardship and their impact on financial markets and the broader economy,” but didn’t elaborate.
Vanguard cited its “unique client-owned structure, whereby its funds own the firm but the funds are owned by their shareholders. That arrangement “aligns the interests of Vanguard with those of its client-owners, helping ensure profits are reinvested to lower fees for clients.”