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Editorial

Asset concentration raises questions

The institutional investment world is becoming more concentrated. In the wider business world that would be a matter of concern, but it's not clear that is so in the institutional investment world.

For the first time in the 45-year history of Pensions & Investments' investment manager profiles, the top 10 investment managers in terms of worldwide institutional assets all had more than $1 trillion under management. Even more significant, the three largest of those managers accounted for 20.9% of such assets under management by the 500 largest firms profiled. In 2002, the top three accounted for 15.2% of the combined assets of the 500 largest firms; in 2012, the percentage was 17.7%.

The largest of the managers in P&I's universeis BlackRock (BLK) Inc. (BLK), with $3.88 trillion at year-end 2017, followed by Vanguard Group, $3.1 trillion, and State Street Global Advisors, $2.1 trillion. All three are index fund managers. The assets managed by BlackRock and Vanguard in particular have exploded. BlackRock's assets grew by almost 393% in the past decade, much of it through acquisition, while Vanguard's grew 372% through organic growth, mostly in its index funds. Ten years ago, Vanguard managed $656.9 billion in total worldwide institutional assets, second to Barclays Global Investors, which was acquired by BlackRock in 2009.

The growth of indexed management has so far been a positive for individual and institutional investors because it has cut investment costs. Index funds or exchange-traded funds can be used for investment for 10 basis points or less, and no doubt have saved investors billion of dollars since index funds were introduced.

But there are questions that should be explored by academics:

  • Is this level of concentration in three large financial institutions a danger to the health of the stock markets, the financial system and the larger economy? If so, how; if not, why not? What event or series of events could threaten the health of any of these three managers?
  • Is it of concern that the three largest managers all manage significant amounts of assets in index funds? A significant amount of the indexed assets is benchmarked to the Standard & Poor's 500, as are substantial amounts of money in ETFs. Does this not provide upward pressure in bull markets in the U.S. and downward pressure in bear markets? Is this healthy?
  • At what level of indexing, if at all, does the U.S. stock market become less efficient at pricing company stocks? That is, at what level of indexing does the search for inefficiently priced stocks, the search for alpha, become more profitable? Some argue high levels of indexing will distort the capital allocation function of the market. Is this so, and in an era of private equity financing, does it matter?
  • Do the stocks included in the indexes outperform those not in the indexes over time? If so, is this being exploited by money managers?

So far there are no obvious downsides to the high concentration of assets among the three largest investment managers — and in the top 10, only questions that should be answered after rigorous analysis.