Within the world of corporate governance, there has hardly been a more important recent development than the rise of the ‘Big Three’ asset managers—Vanguard, State Street Global Advisors, and BlackRock. Due to the popularity of index funds and ETFs, these asset managers now represent some of the largest owners of US public companies. And because of their size and corporate governance influence, a robust scholarly literature has identified the promises and perils of Big Three ownership. In a new book chapter, we identify a series of proxies, or shorthand terms, that first appeared in the foundational works in this literature and have become commonplace in both scholarly articles and the financial press. We further show how this shorthand can contribute to misperceptions and confusion.
The first shorthand is the use of the term ‘Big Three’ to refer to three distinct asset managers. Each of the Big Three manage vast amounts of money in indexed products—amounts that have grown dramatically thanks to the rising popularity of index-based investing. However, there are important differences between each asset manager, both in terms of the composition of the assets they manage and their own institutional structure and operations (and our chapter describes these differences in detail). As such, it does not always make sense to lump these institutions together. The focus on these three institutions has also limited scholarly focus in important ways. For example, the term excludes Fidelity, even though it is larger than State Street in terms of AUM and has also benefitted from a steady inflow of investor funds over the past several years.
The second shorthand is to equate the Big Three with ‘passive’ funds. This misperception is widespread, with many papers—including prior work by one of us—studying the Big Three’s governance practices to better understand the incentives of passive fund managers. Although this shorthand can be useful under certain circ*mstances, we show that it has important limitations. After all, each of the Big Three also manage large amounts of active money, and the index funds that they offer are themselves far from hom*ogenous.
This brings us to the final shorthand—the idea that ‘index funds’ are all passive and interchangeable. We explore the limitations of this shorthand by showing that the concept of ‘passive investing’ is undertheorized, and that there is ample diversity across index funds. In other words, just as there are closet indexers, or active funds that are really quite ‘passive,’ index funds vary dramatically in terms of the discretion that is awarded to—and used by—portfolio managers, the fees that are levied, and the trading strategy that is used. As such, the active/passive dichotomy that is used both by scholars and portfolio managers to market their mutual funds obscures important features of this market.
The final section of our chapter discusses the implications of these observations for future scholarship. Taken together, they shed light on conversations about how the rise of ‘passive’ investing affects corporate governance. Beyond scholarly relevance, these observations matter for policymakers seeking to respond to these market developments with legislative action. For example, the INDEX Act, a bill recently introduced in the Senate, would require investment advisers to pass through the votes of ‘passively managed funds,’ defined as any fund that tracks an index or discloses that it is a passive fund or index fund. As we show, this definition sweeps ‘closet active’ funds under its umbrella.
Our analysis also sheds light on other pressing corporate governance conversations, and in particular, those about the growth and appropriate role of large asset managers. We chart these implications in further detail and highlight questions for future research.
Dorothy Lund is Associate Professor of Law at USC Gould School of Law.
Adriana Z. Robertson is the Donald N. Pritzker Professor of Business Law at the University of Chicago Law School.
This post is part of an OBLB series on Board-Shareholder Dialogue. The introductory post of the series is available here. Other posts in the series can be accessed fromthe OBLB series page.
FAQs
Within the world of corporate governance, there has hardly been a more important recent development than the rise of the 'Big Three' asset managers—Vanguard, State Street Global Advisors, and BlackRock.
What are the big three index companies? ›
This Article examines the large, steady, and continuing growth of the Big Three index fund managers—BlackRock, Vanguard, and State Street Global Advisors.
Who are the largest index asset managers? ›
Largest companies
| Rank | Firm/company | AUM (billion USD) |
|---|
| 1 | BlackRock | 9,090 |
| 2 | Vanguard Group | 7,600 |
| 3 | UBS | 5,710 |
| 4 | Fidelity Investments | 4,240 |
16 more rowsThis burgeoning passive index fund industry is dominated by BlackRock, Vanguard, and State Street, which we call the 'Big Three'.
Who owns BlackRock and Vanguard? ›
Who Owns BlackRock? BlackRock is publicly owned, with its shares held by various shareholders, including institutional investors like Vanguard Group and State Street Corporation and individual shareholders. The specifics of these shareholders can change over time.
How much of the S&P 500 does BlackRock own? ›
How much of the S&P 500 is currently owned by BlackRock, Vanguard, and State Street? As of the end of 2021, BlackRock owned approximately 11% of the S&P 500 [1]. Vanguard owned approximately 10% [1], and State Street owned approximately 7% [1].
Who owns BlackRock? ›
Who owns BlackRock? BlackRock is not owned by a single individual or company. Instead, its shares are owned by a large number of individual and institutional investors. The biggest institutional shareholders such as The Vanguard Group and State Street are merely custodians of the stock for their clients.
Who is the largest global asset manager? ›
Vanguard takes institutional lead over BlackRock
BlackRock remains the world's largest asset manager overall.
Who is the largest index provider in the world? ›
S&P Dow Jones Indices
SPDJI is the world's largest provider of financial market indexes, and its most important index is the most widely followed one, the S&P 500.
How many portfolio managers beat the S&P 500? ›
According to SPIVA, no manager stays in the top 25% of all managers, let alone outperform the index for 5 years in a row. Only just over 1% manage to stay in the top half. In essence, those demonstrating superior performance today are highly unlikely to replicate that success in the upcoming year.
Less than 10% of active large-cap fund managers have outperformed the S&P 500 over the last 15 years. The biggest drag on investment returns is unavoidable, but you can minimize it if you're smart. Here's what to look for when choosing a simple investment that can beat the Wall Street pros.
Which is better, Vanguard or BlackRock? ›
BlackRock offers a more diverse range of investment strategies, including both passive and active management, whereas Vanguard predominantly emphasizes its passive investment approach.
Does BlackRock have too much power? ›
Critics argue that BlackRock has too much control over housing, markets, policymaking, and more. For example, BlackRock was accused of worsening housing unaffordability by buying tens of thousands of homes during the Great Recession, raising prices. Its significant ownership stakes also concentrate on corporate power.
Who is the smartest investor? ›
Warren Buffett: Do the Research
Warren Buffett is widely considered to be the most successful investor in history. Not only is he one of the richest men in the world, but he also has had the financial ear of numerous presidents and world leaders.
Who is the number one asset manager in the world? ›
The research shows that BlackRock is both the world's largest asset manager and the first to exceed US$10 trillion.
Who are Vanguard and BlackRock? ›
Vanguard and BlackRock are the world's largest investment firms. Vanguard focuses more on passive options, and BlackRock offers a number of strategies. Vanguard and BlackRock both have unique and very different fee structures. Consider the fee structures, services, and investment options to make the best choice.
Who does BlackRock own? ›
What companies are owned by BlackRock? BlackRock has acquired several companies over the years, including Barclays Global Investor, which includes the popular ETF platform iShares. The investment manager also owns eFront, Kreos Capital, Aperio, and Merril Lynch Investment Management.
Who is the largest ESG asset manager? ›
The especially low-rated assets managers are four of the world's largest: BlackRock, Vanguard, Fidelity and SSGA. These four esg asset management firms collectively manage over $23trn (£17.8trn) in assets, which is a third of the total AUM of all the asset managers that ShareAction looked at.
