Bernie Sanders vs the Big Three
Ownership concentration isn't a fringe concern
Bernie Sanders has hit out at the concentrated power accumulated by the mega passive managers and the economic and political risks this poses. He’s been accused of not understanding indexing and launching an ill-informed attack on a low-cost investment option utilised by millions of ordinary people either directly or through workplace saving schemes.
So let’s have a look at what he said:
If… the ‘Big Three’ might own 30% or more of the U.S. stock market—effective control. I do not believe that such concentration would serve the national interest
No, wait a second, that was actually Vanguard founder Jack Bogle writing about his concerns about ownership concentration driven by indexing in the WSJ in 2018.
Here’s Bernie:
We have a new bunch of emperors, and they are the people who vote the shares in the index funds… I think the world of [Larry] Fink, but I am not sure I want him to be my emperor.
Whoops, wrong again, that was Charlie Munger.
This is a political one, must be Sanders?
BlackRock, State Street, & Vanguard represent arguably the most powerful cartel in human history: they’re the largest shareholders of nearly every major public company (even of each other)… This raises serious fiduciary, antitrust, and conflict-of-interest concerns….
Sorry, actually that was Vivek Ramaswamy.
Maybe this is him?
The Big Three, taken together, have become the largest shareholder in 40% of all publicly listed firms in the United States… In the S&P 500 – the benchmark index of America’s largest corporations – the situation is even more extreme. Together, the Big Three are the largest single shareholder in almost 90% of S&P 500 firms, including Apple, Microsoft, ExxonMobil, General Electric and Coca-Cola… Hence, just three companies wield an enormous potential power over corporate America.
No, that’s three academics writing about indexation back in 2017.
Perhaps this is Sanders?
How do index funds exercise political influence? They mostly do so indirectly, as owners of large blocks of corporate shares. Because they own an increasing share of all large public companies, they influence much of the economy... They work to put policy issues on the public agenda, to influence how regulations are shaped, and to respond to company-specific choices and crises. By influencing companies, they influence the economy, and the way that elected officials govern. Even if Congress or the SEC or some other agency does not mandate that companies behave in a certain way, index funds can pressure companies to act that way. Corporate governance can be and increasingly has become a substitute for ordinary political governance.
I’m afraid that one is from John Coates.
This one really is from Bernie Sanders:
This is what oligarchy is about. Today just 3 Wall Street firms, BlackRock, Vanguard & State Street manage $20.7 trillion in assets. These 3 firms are major shareholders in 95% of S&P 500 companies. Democracy will not survive with this concentration of economic & political power.
It’s not much different from what many others have said is it?
The reality is that it is very easy to find people from across the political spectrum, from finance and academia, expressing reservations about the impact of indexing on economic concentration. It also features in the conclusion of Robin Wigglesworth’s excellent book on the history of indexing: Trillions. I personally first heard criticism of indexing at scale from an actuary at Aon in about 1998, more focused on the impact on price formation if a large proportion of shares are passively managed. Clearly then this is not a fringe concern.
As I’ve written before, the fact that people coming from very different political perspectives see the same problem increases the likelihood of cross-party co-operation to try to tackle it - whether you think that’s a good idea or not. Because so many votes are concentrated in the hands of a small number of a large managers that matters - whichever way they vote. That’s how Sanders and Ramaswamy end up making the same point from different directions.
Personally, I am in agreement with the various critics that there are issues here to be concerned about. The orientation of those who both invest in everything and cast a large number of votes matters a bit to a lot of companies. So, overall, that matters a lot. Therefore we should discuss it and consider what response, if any, is required. I also agree with John Coates that it’s important to tread carefully. Indexing is a genuinely valuable innovation that benefits lots of people. I’m struck by the conclusion to the 2017 article:
In many respects, the index fund boom is turning BlackRock, Vanguard and State Street into something resembling low-cost public utilities with a quasi-monopolistic position.
The low-cost utility part is good, it’s the concentration that is the problem. We can likely find a way through, but it will not do to ignore the elephant in the market.