A major shift is taking place in the stock market investment, and the spin-off effects are set to have a major impact on the corporate sector in America.
The past was when investors and large corporations primarily invested in mutual funds that were actively managed, like Fidelity, where fund managers choose stocks in the hopes to beat the market. However, since the 2008 financial crisis the investors have changed towards index funds that mimic established indexes of stocks, like S&P 500. S&P 500.
The magnitude of this change is staggering. Between 2007 and 2016, actively managed funds have reported outflows of approximately US$1,200 billion. Index funds have an inflow of more than $1,400 billion.
In the first quarter of 2017, index funds earned more than 200 billion dollars, which is the largest annual figure for the quarter.
Are we democratising the market?
This change, which is arguably the largest investment shift ever recorded, can be attributed to the index funds’ lower expenses.
Actively managed funds analyze the market, and their managers are compensated for their work. However, they are not in a position to consistently beat an index.
Why pay between 1% and 2% of fees every calendar year to fund active while index funds cost just only a tenth of the price and offer the same results?
Certain observers have praised this as a ” democratisation of investing” due to the fact that it has drastically reduced costs for investors.
However, other effects of this shift aren’t as democratizing. The main difference between the active and index fund industries has to do with the latter being divided into hundreds of different asset management companies, both large and small.
The rapidly growing index sector, however is extremely concentrated. This sector is led by three massive American Asset managers: BlackRock, Vanguard and State Street – which we refer to as”the Big Three.
the BlackRock’s Manhattan headquarters. Eduardo Munoz/Reuters
The lower costs, aside from the growth of the index fund, have resulted in an enormous concentration of ownership by corporations. In total, BlackRock, Vanguard and State Street have nearly 11 trillion dollars in investments under management. This is higher than any sovereign wealth fund and more than three times the total value of hedge funds worldwide.
In the recently published study in a paper that was recently published, in a form that was recently published, our research team from CORPNET thoroughly mapped shares held by three companies, the Big Three. We discovered that the Big Three, taken together, are now the largest shareholder in 40% of publicly traded firms across the United States.
Figure 1: The ownership network that is owned by The Big Three in listed US companies. (See the paper we wrote for a discussion of colors). Fichtner, Heemskerk & Garcia-Bernardo (2017)
In 2015 the 1,600 American firms had a combined income of around US$9.1 trillion, which equates to a market capitalization of over 17 trillion dollars, which employed over 23.5 million employees.
The S&P 500 – the benchmark index of the largest American companies – the situation is more severe. Together, three of the Big Three are the largest single shareholder in more than 90 percent of S&P 500 companies, which includes Apple, Microsoft, ExxonMobil, General Electric, and Coca-Cola. The index is on which the largest percentage of people invest.
Figure 2: Statistic about how much ownership is held by three of the Big Three in listed US companies. Fichtner, Heemskerk & Garcia-Bernardo (2017)
The power of shareholders accompanies corporate ownership. BlackRock recently claimed that legally, it is in no way the “owner” of the shares it holds but instead acts as a custodian for its shareholders.
It’s a legal issue that lawyers can determine. The undisputed fact is it is that the Big Three do exert the voting rights that come with these shares. This means that they must be seen as owners de facto by corporate executives.
They have, in fact, made it clear that they are seeking to influence. William McNabb, the chairman and chief executive officer of Vanguard In 2015, Vanguard’s chairman and CEO stated that “In previous years, many have thought that our largely passive management style reflects that we are indifferent towards corporate governance. It is far from the fact.”