FT Alphaville loves Charlie Munger, the famously irascible billionaire vice president of Berkshire Hathaway. Earlier this year, Charlie shot his anger towards a phenomenon his partner Warren Buffett has frequently rented.
“We have a new group of emperors, and they are the ones who vote for index fund stocks,” Munger said at the annual meeting of Daily Newspaper Corp in February. “I’m thinking of Larry Fink’s world, but I’m not sure I want him to be my emperor.”
Munger’s words reflect growing concern among some investors, business executives, regulators, policymakers and politicians. Academics have even coined the term “asset manager capitalismto describe the new reality of a financial system now dominated by fund managers rather than banks.
This is a phenomenon that will only increase. Some believe that the end result of the current trend of passive investing in asset management is that just a dozen people could end up exercising de facto control over most public companies in the United States – and even maybe in the world.
That was the provocative argument of Harvard Law School professor John Coates in an incendiary 2018 article titled The twelve problem.
“Unless the law changes, the effect of indexation will be to overturn the concept of ‘passive’ investing and produce the greatest concentration of economic control in our lifetime. . . More fundamentally, the rise of indexation presents an acute, general and political challenge to company law. The prospect of twelve people potentially even controlling most of the economy poses a first-order problem of legitimacy and accountability.
Naturally, the investment industry – and especially the bigger index fund giants – didn’t care. But the benefits of scale in asset management, and passive investing in particular, are becoming clearer. Iconoclastic law professors are no longer the only ones warning of growing concentration of ownership, even financial industry insiders are growing increasingly uneasy with the current trajectory – as pointed out by the Munger’s acerbic observation.
Last year, the big got even bigger. At the end of 2021, Vanguard, BlackRock and State Street, the three largest index fund providers, together control an average of 18.7% of S&P 500 companies, according to lazard. Their small business ownership is even more concentrated. At the end of last year, they held 22.8% of the shares of the mid-sized S&P 400 index and 28.2% of the benchmark S&P 600 small-company index.
Elon Musk is among those who now oppose this. Like Lazard Noted in its report, “continued flows into passive strategies have fueled concentration of ownership in ‘Big 3’ index fund complexes, inviting an increasing level of scrutiny from regulators and other stakeholders.”
The debate got FT Alphaville thinking.
Professor Coates was talking about an even more concentrated future of index funds, but who are the best candidates for the dozen people in power he is postulating today?
Here is the entirely informal FTAV list of who we believe are the most powerful people in the investment industry – and therefore the financial world – right now. Some are obvious, while others have a more subtle influence.
The most obvious member of this group. Fink’s shrewd purchase of index fund giant Barclays Global Investors in 2009 transformed his company BlackRock into the world’s largest investment group, with nearly $10 billion in assets under management, around two-thirds of which are in passive funds. Coupled with Fink’s tradition of an annual open letter to business leaders, this has placed BlackRock in the crosshairs of the American left and right.
Runs Vanguard, BlackRock’s largest competitor in the United States, and an index fund juggernaut with about $8 billion under management. Although he planned to follow his parents into a medical career, Buckley joined Vanguard in 1991 as an assistant to founder Jack Bogle. In 2018, he became the company’s third CEO since Bogle’s retirement. The company is now transforming into a broader wealth manager with a big step into financial advice as well.
State Street is generally considered the third member of the “big three” in the index fund industry, thanks to the size of its pioneering exchange-traded fund business. But Johnson’s family company Fidelity overtook her to become the world’s third-largest asset manager, with its $4.2 billion only surpassed by BlackRock and Vanguard. Last year, its passive fund management arm, Geode, passed the $1,000,000,000 mark in assets, signaling its emergence as a major player in the index fund world.
The State Street CEO is an asset management veteran, having joined in 2015 to initially lead its State Street Global Advisors investment arm of Fidelity, where he ran the Boston rival firm’s fund management business. . Although O’Hanley was widely respected in the industry, SSGA grew more slowly than many of its main rivals, leading O’Hanley to seek acquisitions to strengthen itself.
When Fernandez engineered the spin-out of Morgan Stanley’s financial benchmarking business with Capital Group, indexing was a dormant industry and the unit was valued at just $20 million. Today, MSCI is one of the “Big Three” benchmark companies and is valued at over $31 billion. MSCI is particularly dominant in international indices and has close ties with BlackRock. (Many of its exchange-traded funds follow MSCI gauges.)
The CEO of S&P Dow Jones Indices is an index fund veteran, having worked at pioneer Barclays Global Investors in the mid-2000s and has since led the ETF units of Lyxor, Credit Suisse and Invesco, before joining the investment giant. S&P benchmarking. Draper also chairs the industry trade body, the Index Industry Association, which boasts of how its members manage over 3 million indices with tens of trillions of dollars tied to them.
Aberdeen Standard Life Abrdn as to who rose to the top spot from the London Stock Exchange’s ‘big three’ index provider FTSE Russell last year. In addition to the FTSE indices formerly associated with FT, Staal oversees the large benchmark Russell Index. Their annual variations tend to result in the largest trading day in the United States each year.
Retelny ran one of the investment industry’s two most underrated brokerages, proxy advisor Institutional Shareholder Services, for more than a decade. Thousands of investors with trillions of dollars use ISS recommendations on how to vote on various AGM issues, from the mundane to the inflammatory, sometimes annoying CEOs and their allies in the process.
Glass-Lewis is the second of the two dominant proxy advisers and is led by its co-founder Cameron, a former lawyer. Like ISS, Glass-Lewis is quietly influential in the world of corporate finance, given the number of investors who will blindly vote whatever path he recommends.
There is not a single pool of money bigger than the Japanese government’s $1.5 billion pension investment fund, which gives its head Masataka Miyazono a lot of influence in the financial world. Attention naturally turns to asset managers like BlackRock, but broad “asset owners” like GPIF are also helping to set standards for global markets. When he stripped a big mandate from BlackRock and gave it to Legal & General, he was said to have helped influence Fink’s decision to put his full weight behind the burgeoning ESG phenomenon.
A former hedge fund manager was an odd choice to run Norges Bank Investment Management, a hugely passive $1.2 billion Norwegian company, but Tangen got into the public speaking aspects. NBIM has long excluded companies it deems ethically incompatible with Norwegian state ownership, but has become increasingly vocal on a range of issues and transparent about how it votes on a host of sensitive topics.
While GPIF and NBIM will make their views known quite publicly and regularly, the third asset owner on this list is diametrically different. China Investment Company was created with $200 billion in 2007 to diversify China’s foreign exchange reserves, and is now one of the largest sovereign wealth funds in the world, with a valued $1.2 billion in assets under management. There’s little online about its chairman and CEO Peng Chun — except for a fairly standard technocratic career in China’s banking industry — but the size of the checks he writes and China’s financial growth could make him an essential member of this group.
JOKER: Hamed Bin Zayed al Nahyan
The Abu Dhabi Investment Authority was established in 1976, the year Mao Zedong died and Norway was just beginning to pump a few barrels of oil from the North Sea. Adia has therefore been a major player in finance for much longer than its Norwegian and Chinese counterparts.
But it is smaller than the other three asset owners on this list – while Adia has remained schtum on its size, the Sovereign Wealth Fund Institute estimates its assets at around $700 billion – and in terms of profile, the investment group overseen by Sheikh Hamed is these days arguably surpassed by other Abu Dhabi funds like Mubadala.