BlackRock Takes on Ivory Tower Over Stock-Ownership Research

  • Academics suggest asset managers can discourage competition
  • Novick says it’s premature for lawmakers to act on findings

The world’s largest asset managers are muscling into an academic debate, attempting to rebut research into their market power before lawmakers latch onto it to support investing curbs.

In a paper set for release this week, BlackRock Inc. executives led by Vice Chairman Barbara Novick question the methodology and conclusions of academic work that finds that asset managers’ ownership stakes in rival companies can undermine competition and lead to higher prices for consumers. The firm’s executives said it’s too early for government officials to take action based on the studies.

Researchers at the University of Chicago and Yale University have proposed curtailing big asset managers’ investments in a given industry. Another study sets out possible changes to voting rules. BlackRock, which manages $5.1 trillion in assets, said such measures could harm retail investors and upend the growing index-fund business, a view shared by senior executives at Vanguard Group Inc. and State Street Corp.

“It’s important that there be an open airing of all the different arguments before anyone takes any policy steps,” Novick said in an interview. Research in this area has “leap-frogged” a thorough academic debate and is entering the realm of policy too soon, she said.

Market Share

The research is based on the theory that if an asset manager holds stakes in the major companies in one industry, it would prefer they all produce healthy profits rather than aggressively compete with each other for market share.

In the proposal from the researchers at Yale and the University of Chicago, institutional investors could avoid government litigation by concentrating their holdings in one firm per industry, while being allowed to invest in multiple industries, or by limiting the total value of their investment to less than 1 percent of an industry.

“There is much room for debate over these complex and rich issues and I salute any call or offer of data for more rigorous research,” Glen Weyl, visiting senior research scholar and lecturer at Yale, said by e-mail. “However, industry putting out research with little substance to cast doubt on respected academic findings is rarely useful and often harmful, as seen in the debates over climate science and the health effects of tobacco."

John C. Bogle, Vanguard’s founder, said in an interview that the researchers haven’t looked at the “practical consequences” of the proposed ownership restrictions on some of the industry’s most popular investment products.

Common Ownership

“Show me what the S&P 500 index fund would look like if the common ownership was eliminated, if you could only have one company in an industry,” Bogle said. “It would destroy the industry” of indexing by transforming it into a business of stock-selection and active management, he said.

The asset managers’ response shows their concern that lawmakers may take the matter further. Already, some members of the European Parliament in Brussels have questioned whether stiffer regulations might be needed. The German Monopolies Commission, a committee of experts that advises the government on competition law, called in September for more study of institutional ownership stakes in companies in the same industry.

In the U.S., the Justice Department’s anti-trust unit has reviewed the research and the effect of asset managers’ common ownership stakes in airlines and other industries.

The debate has emerged during a time of massive growth in the passive and index investing business at BlackRock, Vanguard and State Street. Equity investments in index vehicles, including ETFs, accounted for about 34 percent of the $24.6 trillion of global equity assets under management by external managers, according to BlackRock data at the end of 2015.

Minority Shareholder

The academic research has centered on those asset managers’ investments on behalf of clients. The three firms together constitute the largest shareholder in 88 percent of companies in the S&P 500, according to researchers at the University of Amsterdam first published last June. A separate estimate found BlackRock to be the largest shareholder in about a third of companies in each of the FTSE 100 and DAX 30 indexes.

Novick said that big asset managers typically own less than 20 percent of a company, even when their holdings are lumped together.

“Any company is going to care about the other 80, 90 percent of their shareholders,” Novick said. “They’re not going to do something that they think somehow favors one versus another.”

BlackRock rejected researchers’ arguments that common ownership discourages competition among companies through shareholders’ say on executive pay. Fund managers need to be able to engage to with companies’ management to influence and monitor corporate governance and represent their clients’ best interests over the long-term, the firm said.

Senior Management

Vanguard Chief Executive Officer Bill McNabb said the asset manager’s discussions with corporate executives on compensation encourage competition.

“It’s incentivized senior management teams to perform better than their competitors and align incentives accordingly,” McNabb said in an interview. “It’s not been ‘Just do fine, just what the market would do,’ it’s actually been, ‘Beat your competitors.”’

BlackRock also called it “flawed” thinking to suggest that asset managers are incentivized to discourage competition among the companies they invest in. Asset managers offer many funds and different strategies, and “ascribing a single view on a particular security to an asset manager is not supported by the reality of the business,” the firm said.

“Even were the conclusions in this research found accurate, the policy proposals based on this literature would lead to more harm than good,” BlackRock said. “Such changes would increase costs and disrupt the process of saving for retirement by individuals.”

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