Three investment firms are dominant. Should you worry?
When I got on the phone with Vivek Ramaswamy on Tuesday afternoon, I was not expecting to find common cause. Ramaswamy is a tech entrepreneur, a frequent contributor to conservative outlets including The Wall Street Journal's editorial page and author of a book whose very title sounds as if it were formulated in a lab at Fox News to maximally tickle the base and trigger the libs: “Woke, Inc.: Inside Corporate America's Social Justice Scam.”
I had reached out to Ramaswamy to discuss his new venture, Strive Asset Management, an investment firm that he says will urge corporations to stay out of politics. Among Strive's funders, though, is one of the more politically active people in business, Peter Thiel, a billionaire venture capitalist who supported Donald Trump and is now funding a slate of Trumploving congressional candidates.
It turned out I was right: I did not agree with a lot of what Ramaswamy had to say. Not only are our politics radically at odds, we also differ on what “politics” means in modern American capitalism. Yet despite our disagreements, something odd happened. I found myself nodding along with what is perhaps Ramaswamy's fundamental point: that three gigantic American asset management firms — BlackRock, Vanguard and State Street — control too much of the global economy.
The firms manage funds invested by large institutions such as pension funds and university endowments as well as those for companies and, in some cases, individual investors such as me and perhaps you, too. Their holdings are colossal. BlackRock manages nearly $10 trillion in investments. Vanguard has $8 trillion and State Street has $4 trillion. Their combined $22 trillion in managed assets is the equivalent of more than half of the combined value of all shares for companies in the S&P 500 (about $38 trillion). Their power is expected to grow. An analysis published in the Boston University Law Review in 2019 estimated that the Big Three could control as much as 40% of shareholder votes in the S&P 500 within two decades.
Why is this a problem? Ramaswamy argues that the main issue is that the firms are using their heft to push companies in which they hold large investments into adopting liberal political positions — things such as focusing on climate change or improving the diversity of their workforce. I think that's a canard.
The real danger posed by the three is economic, not political. The American economy is lumbering under monopoly and oligopoly. In many industries, from airlines to internet advertising to health care to banks to mobile phone providers, Americans can do business with just a handful of companies.
BlackRock, Vanguard and State Street have been extraordinarily good for investors — their passive-investing index funds have lowered costs and improved returns for millions of people. But their rise has come at the cost of intense concentration in corporate ownership, potentially supercharging the oligopolistic effects of already oligopolistic industries.
John Coates, a professor at Harvard Law School, has written that the growth of indexation and the Big Three means that in the future, about a dozen people at investment firms will hold power over most American companies. Researchers have argued that this level of concentration will reduce companies' incentives to compete with one another.
Indeed, there is some evidence that their concentrated ownership is associated with lower wages and employment and is already leading to price increases in some industries, including in airlines, pharmaceuticals and consumer goods. The firms dispute this. In a 2019 paper, Vanguard's researchers said that when they studied lots of industries across a long period of time, “we do not find conclusive evidence” that common ownership led to higher profits.
In late 2018, a few months before his death, John Bogle, the visionary founder of Vanguard who developed the first index fund for individual investors, published an extraordinary article in The Wall Street Journal assessing the impact of his life's work. The index fund had revolutionized Wall Street — but what happens, he wondered, “if it becomes too successful for its own good?”
Bogle pointed out that asset management is a business of scale — the more money that BlackRock or Vanguard or State Street manages, the more it can lower its fees for investors. This makes it difficult for new companies to enter the business, meaning that the Big Three's hold on the market seems likely to persist. “I do not believe that such concentration would serve the national interest,” Bogle wrote.
Coates, of Harvard, argues that policymakers will have to move carefully to manage the dangers of concentration without limiting the benefits to investors of these firms' low-cost funds. “No doubt getting the balance right will require judgment and experimentation,” he wrote.
But the most pressing issue is for us to recognize the problem. The growing influence of three large fund managers is not likely to diminish. Ramaswamy's take on the problem is wrong, but he's right that it's a problem. How much power do the three companies have to accumulate before we decide it's too much?