By Glauco Benigni*
They are called Vanguard, Black Rock and State Street Global Advisor and they are the world’s 3 largest mutual funds. They are also known as asset managers or investment funds, operated by professional experts who collect “fresh” money from an immense and varied number of investors and savers. With this “fresh money” they buy securities in the various stock exchanges of the planet and redistribute profits (when things go well) to those who have entrusted them with the surplus of their capital and/or savings. Investors can be of a commercial or institutional nature, but also simple private individuals who access the various investment plans attributable to and controlled by the Big 3.
The 3 appear closely interconnected with each other, thanks to proprietary intersections and extremely confidential and personal links among their representatives at the head of operations and the respective boards of directors.
Basically, when we speak of “financial capitalism”, of “neoliberal imperialism”, or when we evoke “finance” tout court, we speak of or rather “evoke” them as a compass for guide the destinies of today’s world and the future without mentioning them. Like any true power, they are already taboo.
The 3 are at the centre of a vast galaxy of acronyms, in which other important mutual funds and financial entities appear (including Fidelity, T-Rowe, Goldman Sachs, JPMorgan and Morgan Stanley). The financial masses managed by them act as within a gravitational system, causing attractions and repulsions on the entire constellation of banking and insurance. Thanks to strategic positions in the various shareholdings, made up of their monumental investments, the Big 3 are able to “condition” the direction of each area of activity: production, distribution of goods and services, transport, healthcare, research, etc..
Imagine that, in the last 12 years, 3 massive new planets have grown dramatically, in a planetary system, dynamic but fundamentally balanced, and have assumed a central position in the system, thus determining new balances and imbalances and new orbits of all the previous planets and satellites that were present in the system.
The 3 obviously enjoy maximum respect, but they really scare all those who – rightly – fear the verticalisation of power.
As early as 2017, Jan Fichtner, Eelke M. Heemskerk and Javier Garcia, three researchers from the University of Amsterdam, explained that: “Since 2008, a massive shift has occurred from active toward passive investment strategies (see below, ed.). The passive index funds sector is dominated by the ‘Big Three’. We have comprehensively mapped ownership of the Big Three in the United States and found that together they make up the largest shareholder in 88% of the 500 companies in the S&P index.”
In other words, this means that the Big Three are the largest shareholder in almost 90% of the companies in which most people invest. To give an idea, the S&P 500 lists both old giants of the ‘old economy’ (such as ExxonMobil, General Electric, Coca-Cola, Johnson & Johnson and JP Morgan) and all the new giants of the ‘digital age’ (Alphabet-Google, Amazon, Facebook, Microsoft and Apple). This means that their influence also extends to the major vehicles of information and e-commerce.
These are exceptional findings. If – as seems – they correspond to reality, the scenario that appears contravenes any previous vision of free competition and describes a dominant position that had never been achieved in history.
“Through an analysis of proxy vote records,” continue the Amsterdam professors, “we find that the Big Three do utilise coordinated voting strategies and hence follow a centralised corporate governance strategy. They generally vote with management, except at director (re-)elections. Moreover, the Big Three may exert ‘hidden power’ through two channels: first, via private engagements with management of invested companies; and second, because company executives could be inclined to internalising the objectives of the Big Three.”
BlackRock recently claimed that it is not legally the “owner” of the shares it holds. “We are rather the custodians of money entrusted to us by investors,” they said.
This is a technicality to be interpreted: what is undeniable is that the Big Three exercise the voting rights associated with these shares. Therefore, they must be perceived as de facto owners by corporate executives. It is easy “to be prone” when your post and your millionaire liquidation depends on who is “custodian” of the controlling share package of the company you work for.
As long as the accusing finger was pointed by the Europeans – and notwithstanding the concerns of the EU Antitrust Commission – the scene in the USA was minimised and the risks associated with it were underestimated. However, the US Antitrust and Justice Department woke up last year. The real reasons for the new state of alert are obviously political and attributable to the power structures in and around the White House. Officially, the authorities showed concern because among those putting the Big Three under the magnifying glass appeared the Harvard Law School. From their prestigious benches, Lucian Bebchulk and Scott Hirst, two academics considered among the top experts in corporate governance, produced an alarming study called “The Specter of the Giant Three”.
Basically, figures at hand, it is shown that the 3 alone manage 16 trillion dollars (in 2019) and that in this way they find themselves controlling 4 out of 10 shares of the major US corporations.
As explained by Vincenzo Beltrami on Startmagazine: “The Harvard paper has the merit of photographing the exponential growth that especially BlackRock and Vanguard will have in the coming years in the financial structures known to date, triggering a change of global paradigm of which it is already today possible to predict the effects. The Harvard academics have calculated that the masses managed by these giants, with the relative power of representation that derives from them, are destined to increase respectively by 34% in the next ten years and by 41% calculating a period of twenty years.”
Now let us look at some “details” published on Wikipedia:
The Vanguard Group is based in Malvern, a suburb of Philadelphia, Pennsylvania. Founded in 1975 by John C. Bogle, it manages 6.2 trillion dollars in assets and has approximately 17,000 employees. The current CEO is Mortimer J. Buckley.
BlackRock is based in New York. It manages a total of 7.5 trillion dollars in assets, of which one-third invested in Europe and 500 billion in Italy alone. It was founded in 1988 by Laurence D. Fink (CEO), Susan Wagner and Robert S. Kapito. It has 15,000 employees
State Street Global Advisors is the investment management division of State Street Corporation. It manages around 3 trillion dollars. It is based in Boston, Massachusetts. The CEO is Cyrus Taraporevala. It has 2500 employees.
These data confirm that the total assets managed by the Big 3 amounted to 16 trillion dollars in 2019. Now the question is: if the funds are equal to 4 times the German GDP or, if you like, 8 times the Italian public debt … what is the vision of the future of who manages it?
But above all, going back to the projections of the Harvard academics, if you exceed 20 trillion in 2030 and fly towards 30 trillion in 2040, then the funds will be equal to half the GDP of the entire planet Earth.
Adding up all the employees of the Big Three, equal to 35,000 people, how is possible to manage a similar financial mass that is equivalent to that produced by half the population, or 3.5 billion humans? Something serious is going on. Antitrust authorities are therefore right (but are they able to intervene?). If there is one, where is the catch?
Enrico Marro gives us a first “technical” answer from the columns of Sole 24 Ore. “It should be clarified that the main driver of growth is represented by passive management: that is, by ETFs, destined to reach 25 thousand billion dollars in assets managed within the next seven years according to estimates by Jim Ross, president of State Street”.
ETFs, or exchange-traded funds, are a type of investment funds belonging to ETPs (Exchange Traded Products), or to the macro family of listed index products, with the aim of replicating a reference index (benchmark) with minimal interventions. Unlike mutual investment funds and SICAVs, they have passive management, are released from the manager’s ability and are listed on the stock exchange in the same way as shares and bonds.
Passive management means that their return is linked to the listing of a stock exchange index (which can be equity, commodity, bond, monetary, etc.) and not to the fund manager’s ability to buy and sell. The manager’s work is limited to verifying the consistency of the fund with the reference index (which may vary due to company acquisitions, bankruptcies, collapses of quotations, etc.), as well as correcting its value in the event of deviations between the fund’s quotation and that of the reference index, which are allowed to the order of a few percentage points (1% or 2%).
“Passive management” makes these funds very economical, with management costs usually lower than the percentage point, and therefore competitive with respect to active funds. Their large or huge diversification, combined with stock exchange trading, makes them competitive with respect to investment in single stocks. And there you have it!
ETFs can also be called “financial clones” because they faithfully mimic the performance of a particular index.
Enrico Marro continues: “There now exist ‘clones’ of all kinds, from those related to pink quotas to those following the Bible, from those that invest by listening to Twitter to those guided by artificial intelligence or that focus on therapeutic marijuana. Not to mention the ETFs that follow sophisticated “smart beta” strategies, more or less countercurrent, sometimes extravagant. All that’s missing is a “clone” on Bitcoin, nipped in the bud by US regulators for obvious reasons of financial stability and common sense.”
I would like to add some macro financial policy considerations to this technical explanation. Before the stock market boom, and in detail before the start of Nasdaq, which replaced “human” buying and selling with digital buying and selling managed by algorithms, exchange value (financial capitalisation) was strongly correlated with use value (produced by the real economy). Simplifying, it can be said that material wealth (GDP) had a reasonable counterpoint in the wealth dealt with in stock exchanges. With the advent of Nasdaq and the first placement on the stock exchange of “all digital” companies, finance begins a path of numerical virtualisation, favoured by digital exchanges that take place in a space-time where speed and volumes tend to infinity while times of access and exchange tend to zero. In this new “numerical-financial dimension”, the production of exchange value is exalted and its volume grows exponentially, “untying itself” from the material counterpoint (the real economy). This has allowed speculators to have access to the production and management of endless financial masses, which are created continuously thanks simply to the multiplication of “exchanges” and have nothing to do with the real material economy. So much so that it is now known that for each dollar or euro corresponding to use value (real economy) there is a slightly higher equivalent value in circulation on the stock exchanges (according to the IMF). XXXX According to other sources, however, the value of market capitalisation would be 4 to 8 times higher than that of planetary GDP.
Here is another explanation – quite disconcerting – of why 35,000 employees manage a value equivalent to what is produced by 3.5 billion humans.
Let’s now look at the scene from the point of view of regulations:
In 1933 in the USA, the Banking Act was incorporated into the wider Glass-Steagall Act. It was the response to the financial crisis of 1929, aimed at introducing measures to contain speculation by financial intermediaries and prevent situations of banking panic. The measures included the introduction of a clear separation between traditional banking and investment banking. Under the law, the two activities could no longer be exercised by the same intermediary, thus creating the separation between commercial banks and investment banks. The real economy was in fact prevented from being directly exposed to the influence of finance. Due to its subsequent repeal in 1999, precisely the opposite happened in the 2007 crisis: insolvency in the subprime mortgage market, which began in 2006, triggered a liquidity crisis that immediately spread to traditional banking, because the latter was mixed with investment activity.
Among the effects of the repeal, the creation of banking groups was permitted which, within them, allow, albeit with some limitations, the exercise of both traditional banking activity and insurance and investment banking activity. After the new Great Recession of 2008, during the Obama presidency, attempts were made to at least partially restore the Glass-Steagall Act with the Dodd-Frank Act. In reality the stable door had opened and the horses had already all bolted. Today some observers believe that the triumphal march of mutual funds was made possible precisely by repeal of the Glass-Steagall Act.
And in fact the extent of the change is surprising: from 2007 to 2016, actively managed funds recorded outflows of approximately 1,200 billion US dollars, while index funds had inflows of over 1,400 billion US dollars.
We now come to historical-philosophical considerations-conclusions concerning the collective behaviour of the human species. Following the Great Revolutions, the idea of equality spread and rights, in some seasons, appeared better than interests. This referred to the idea of distribution of wealth, to be pursued thanks to bargaining between the labour force and capital. It was an action that was proclaimed with the hypothesis that the means of production should belong to those who actually produced wealth and not to the masters of capital. Notwithstanding the many civil and political battles, with the unconditional surrender of the USSR and the decline of socialist and communist ideas, capitalism and its substitutes have won the arm wrestling with the working and peasant masses and with the class of intellectuals who supported them. The elites imposed a neoliberalism that is based no longer and not only on the hegemony deriving from the accumulation of surplus value obtained from the production of goods, but on a series of new sources of income, among which – as described – the uncontrolled production of exchange value on stock exchanges.
Well, this is where the choice has been made by the world population in the last 30 years: is it better to struggle to own the means and infrastructure of production or is it better to try to participate in the profits that the neoliberal system produces on the stock exchange?
Given the disadvantageous gap between the volumes of the real economy and those of numerical finance, having regard to the respective tax rates that favour finance, together with political propaganda, the seduction of advertising and the induction of lifestyles favourable to individualist liberalism, the choice is increasingly turning towards the second option. And so the Anglo-American neoliberal weltanschaung, characterised by the acceptance of the “gamble” outpoints visions characterised by the search for “certainties”. Right now tens (perhaps hundreds) of millions of savers and millions of small and medium-sized companies are not re-investing their savings and capital surpluses in productive structures and only a small minority imagines generating work for themselves and for their “equals”. They are not even thinking of it! As soon as there are some savings, a severance indemnity, a hereditary bequest or an immobilised capital, the overwhelming majority look for “a short way” to make it bear fruit, or the best way to invest it to derive profits and position without tiring and worrying about “the next guy”.
An eloquent figure: according to a Morningstar analysis reported by the Financial Times, in 2018, BlackRock and Vanguard alone collected 57% of what flowed globally in the varied panorama of mutual funds.
Let’s say that in the eternal swing between individualism and collective solidarity, the pole that represents immediate and measurable personal interests is leading the game on a ground that has totally escaped the control of supportive humanism.
To return to the issue of mutual funds and conclude: many believe that everything is legitimate and that their success is determined by historical circumstances and knowledge that is high and above the average of mass capabilities. But we know that behind this image of efficiency lurk very opaque and ambiguous practices. Practices that could even allow, given the enormous amounts of money involved, the buying not only of company managers but also of the governments and oppositions in democracies. Let’s take this into account.
*Italian professional journalist and writer, Bachelor of Mass Communication Sociology. For 20 years he has been a correspondent and media editor for the newspaper La Repubblica, then 15 years in the Italian Radio Television (Rai) where he was responsible for relations with the foreign press and for the promotion and technological development of Rai International.