European lawmakers have taken aim at the influence of the largest index fund managers — and the debate could have implications for the likes of BlackRock, Vanguard and State Street Global Advisors.
Passive funds have enjoyed dramatic growth, with assets hitting $9tn in 2018, according to the Investment Company Institute, the trade body.
Big passive managers own shares in most large companies and this has led to concern over antitrust issues.
BlackRock, Vanguard and State Street, the “big three”, collectively own 17.6 per cent of 1,662 listed US companies, according to figures analysed by the OECD in 2017.
The topic gained prominence in November when Vanguard founder Jack Bogle, who died on Wednesday, warned that passive growth could lead to “a handful of giant institutional investors [holding] voting control of virtually every large US corporation”. He said this would not serve the national interest.
Last week the European Parliament cited OECD research and warned that higher levels of common ownership result in “hidden social cost and reduced product competition”.
Sven Giegold, a Green MEP, said the “dramatic change in the asset management industry” posed dangers to the market economy. “The effects of [large passive funds] have to be taken into account and regulated,” he told the Financial Times. He called for action from the European Commission.
Margrethe Vestager, EU competition commissioner, last year began looking into whether common ownership impinged on competition. That inquiry has yet to result in policy action.
The debate is also at an early stage in the US. Last month, the Federal Trade Commission, the consumer protection agency, conducted a hearing on common ownership.
Asset managers argue that the research that gave rise to the debate is flawed. In a letter to the FTC this month, BlackRock said: “Any debate on ‘common ownership’ should be . . . grounded in accurate and robust analysis. To date, the existing research does not meet this standard.”
Fund groups say they lack incentive to influence the competitive behaviour of companies in which they invest. They also argue that “common ownership” fails to take into account proxy advisers, which have substantial influence over shareholder votes.
According to Barbara Novick, BlackRock's vice-chair, proposals to curtail the power of asset managers “seek to fix a problem that does not exist”. She added that ideas such as limiting asset managers to one equity position per industry or a ban on them buying voting shares were “cause for concern”.
Policymakers may also look at asset managers’ holdings in companies that are being merged. The European Commission took this factor into account when reviewing the deal between agrochemical giants Dow and DuPont in 2017.
The commission concluded that significant common ownership “was likely to negatively affect the benefits of innovation competition for firms subject to this common shareholding”.
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