Image Credit: Christophe Vorlet
By Jason Zweig | 5:59 pm ET Jul. 24, 2015
If it seems your airplane tickets cost too much this summer or your bank is overcharging you at the ATM, you might think about blaming your mutual fund.
That’s the startling—or maybe head-scratching—contention of some recent research that argues the top money-management companies have grown so large that they are indirectly stifling competition in other areas of the economy.
In a paper posted online earlier this month, Einer Elhauge, a professor at Harvard Law School, asserts that concentrated shareholdings by such giant fund managers as BlackRock, Fidelity Investments, State Street and Vanguard Group “are likely to anticompetitively raise prices when the owned businesses compete in a concentrated market.”
Prof. Elhauge bases his arguments largely on earlier research by a team that included Martin Schmalz, a finance professor at the University of Michigan. Looking at the cost of air travel in the U.S., Prof. Schmalz and his colleagues found that ticket prices were 3% to 11% higher when the shares of leading airlines were held widely by the largest asset-management firms. In preliminary work, Prof. Schmalz and colleagues have found similar market-share results at banks heavily owned by giant fund managers.
All this might strike you as a heavy conclusion to hang on a little bit of research. Correlation is not causation, and the researchers acknowledge that they don’t exactly know how concentrated ownership might lead to anticompetitive pricing.
But right or wrong, the researchers’ work does highlight an important issue shaping markets: the sheer scale of some money managers as the asset-management industry grows ever more gargantuan.
Consider that the 10 biggest asset managers run $6.6 trillion in stock mutual funds and exchange-traded funds, according to Avi Nachmany, director of research at Strategic Insight, which analyzes trends in the industry. What’s more, he says, 11 mutual funds and ETFs hold more than $100 billion in assets apiece.
Based on data from FactSet, my colleague Tom McGinty estimates that four firms alone—BlackRock, Fidelity Investments, State Street and Vanguard Group—collectively own 16.4% of Coca-Cola Co. and 17% of PepsiCo; 18.6% of Bank of America, 18.9% of Citigroup, 19.9% of J.P. Morgan Chase and 18% of Wells Fargo & Co.; and 16% of AT&T and 17.8% of Verizon Communications.
The worries about scale expressed in the new research have some deep roots. The original draft of the Investment Company Act of 1940, which governs how mutual funds are managed and marketed, stipulated that no fund could grow larger than $150 million in assets (less than $3 billion in today’s money). Policy makers felt that “too large an aggregation of capital could not be efficiently managed.”
That provision was struck from the bill, and the Securities and Exchange Commission hasn’t studied whether the fund industry has grown so large as to pose a risk to “investors or the public interest” since 1966, when mutual funds had $38 billion in total assets. Today, mutual funds and ETFs hold more than $18 trillion.
Broader problems with competition arise, Profs. Schmalz and Elhauge say, when an industry is dominated by a small number of large companies and the shares in those firms are held heavily by the same asset managers.
“Imagine you owned a big stake in all the restaurants in town or in all the gas stations,” Prof. Schmalz says. “How hard would you want these businesses to compete with each other and engage in price wars?”
The result, these researchers suspect, is tacit collusion instead of free competition—and higher prices for the consumers of goods and services. They say the problem may be particularly acute at index funds, many of which effectively hold permanent positions across a wide swath of companies. Therefore, Prof. Elhauge says, there should be an “antitrust cap on the share of the stock market that in the future can be allowed to go into” index funds.
Unsurprisingly, people in the fund business think the research is poppycock. “We are not investing in companies for the purpose of running them,” says Glenn Booraem, who oversees corporate-governance activities at the Vanguard Group.
“We expect fair and ethical competition between the companies we invest in on behalf of our clients,” says Ed Sweeney, a spokesman for BlackRock. State Street takes its fiduciary duties very seriously and ensures that it meets its clients’ objectives, says Brendan Paul, a spokesman for the firm. The firms say they aren’t violating antitrust law.
The big also don’t always get bigger. Seven of the 10 largest fund firms in 2005 have smaller shares of the market today than they did back then, says Mr. Nachmany of Strategic Insight.
Even so, is there a point at which trading stocks and bonds by the billion becomes disruptive or infeasible? Will owning the largest stakes in every company give a small number of people too much power? Could smaller funds finally gain the upper hand over larger ones? No one really knows, but all investors should be pondering questions like these as the trillions pile up.
Source: The Wall Street Journal