The energy of twelve


FT Alphaville loves Charlie Munger, the famously irascible billionaire vice-chair of Berkshire Hathaway. Earlier this 12 months Charlie turned his ire in the direction of a phenomenon his companion Warren Buffett has continuously praised.

“We have a new bunch of emperors, and they’re the people who vote the shares in the index funds,” Munger stated on the annual assembly of Daily Journal Corp in February. “I think the world of Larry Fink, but I’m not sure I want him to be my emperor.”

Munger’s phrases mirror an growing concern amongst some buyers, company executives, regulators, policymakers and politicians. Academics have even coined the time period “asset manager capitalism” to explain the brand new actuality of a monetary system now dominated by cash managers relatively than banks.

This is a phenomenon that’s solely going to develop extra pronounced. Some suppose that the top end result of the present passive investing development in asset administration is that only a dozen or so folks might find yourself having fun with de facto management over most public firms within the US — and even maybe the world.

That was the provocative argument of John Coates, a professor at Harvard Law School, in an incendiary 2018 paper titled The Problem of Twelve.

“Unless law changes, the effect of indexation will be to turn the concept of ‘passive’ investing on its head and produce the greatest concentration of economic control in our lifetimes . . . More fundamentally, the rise of indexing presents a sharp, general, political challenge to corporate law. The prospect of twelve people even potentially controlling most of the economy poses a legitimacy and accountability issue of the first order.”

Naturally, the funding business — and above all the largest index fund giants — have scoffed at this. But the advantages of scale in asset administration, and passive investing particularly, have gotten clearer. Iconoclastic legislation professors are now not the one ones warning about mounting focus of shareholding, with even finance business insiders changing into more and more uncomfortable with the present trajectory — as Munger’s acerbic commentary highlighted.

Last 12 months, the massive as soon as once more turned even greater. At the top of 2021, Vanguard, BlackRock and State Street, the three greatest index fund suppliers, collectively management on common 18.7 per cent of S&P 500 firms, in accordance with Lazard. Their possession of smaller firms is much more concentrated. By the top of final 12 months, they held 22.8 per cent of shares within the midsized S&P 400 index, and 28.2 per cent of the small-company S&P 600 benchmark.

Elon Musk is amongst these now railing in opposition to this. As Lazard famous in its report, “continued inflows into passive strategies have fuelled ownership concentration in the ‘Big 3’ index fund complexes, inviting an increasing level of scrutiny by regulators and other stakeholders”.

The debate obtained FT Alphaville pondering.

Prof Coates was speaking about an much more concentrated index fund future, however who’re the most effective candidates for the roughly dozen folks of energy he posits in the present day?

Here is the completely casual FTAV record of who we reckon are presently probably the most highly effective folks of the funding business — and subsequently the monetary world. Some are apparent, whereas others wield extra refined affect.

Larry Fink


The most evident member of this group. Fink’s astute buy of index fund big Barclays Global Investors in 2009 has reworked his firm BlackRock into the world’s greatest funding group, with virtually $10tn of property below administration — roughly two-thirds of that are in passive funds. Coupled with Fink’s custom of an annual open letter to chief executives, it has put BlackRock within the crosshairs of each the American left and proper.

Tim Buckley

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Leads Vanguard, BlackRock’s greatest competitor within the US, and an index fund juggernaut with about $8tn below administration. Despite considering following his dad and mom in a medical profession, Buckley joined Vanguard in 1991 as assistant to founder Jack Bogle. In 2018, he turned the corporate’s third CEO since Bogle’s retirement. The firm is now reworking itself right into a broader wealth supervisor with an enormous transfer into monetary recommendation as nicely.

Abigail Johnson

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State Street is normally thought of the third member of the index fund business’s “Big Three”, because of the scale of its pioneering exchange-traded fund enterprise. But Johnson’s household agency Fidelity has leapfrogged it to turn into the world’s third greatest asset supervisor, with its $4.2tn solely surpassed by BlackRock and Vanguard. Its passive cash administration arm Geode final 12 months crossed the $1tn-in-assets mark, underscoring its emergence as a serious participant within the index fund world.

Ron O’Hanley


State Street’s CEO is an asset administration veteran, having joined in 2015 to initiallylead its funding arm State Street Global Advisors from Fidelity, the place he ran the rival Boston outfit’s cash administration enterprise. Although O’Hanley is extensively revered within the business, SSGA is rising extra slowly than lots of its most important rivals, main O’Hanley to search for acquisitions to bulk up.

Henry Fernandez

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When Fernandez engineered the spinout of Morgan Stanley’s monetary benchmarking enterprise with Capital Group, indexing was a sleepy business and the unit was valued at simply $20mn. Today, MSCI is among the benchmarking enterprise’ “Big Three” and is valued at greater than $31bn. MSCI is especially dominant in worldwide indices and has shut hyperlinks with BlackRock. (Many of its change traded funds observe MSCI gauges.)

Dan Draper


The CEO of S&P Dow Jones Indices is an index fund veteran, having labored on the pioneering Barclays Global Investors within the mid-noughties and since then led the ETF items of Lyxor, Credit Suisse and Invesco, earlier than leaping ship to benchmarking big S&P. Draper additionally chairs the business’s commerce physique, the Index Industry Association, which brags about how its members handle over 3m indices with tens of trillions of {dollars} tied to them.

Arne Staal

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A former Aberdeen Standard Life Abrdn quant who ascended to the highest job on the London Stock Exchange’s “big three” index supplier FTSE Russell final 12 months. In addition to the previously FT-associated FTSE indices, Staal oversees the massive Russell benchmark. Their annual adjustments are likely to result in the one greatest buying and selling day within the US yearly.

Gary Retelny


Retelny has for greater than a decade led one of many two least-appreciated energy brokers of the funding business, proxy adviser Institutional Shareholder Services. Thousands of buyers with trillions of {dollars} use ISS’s suggestions on how you can vote on numerous AGM points, from the mundane to the incendiary, generally riling CEOs and their allies within the course of.

Kevin Cameron

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Glass-Lewis is the second of the 2 dominant proxy advisers, and is led by its co-founder Cameron, a former lawyer. Like ISS, Glass-Lewis is quietly influential on the planet of company finance, given what number of buyers will blindly vote no matter means it recommends.

Masataka Miyazono

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There is not any single pool of cash bigger than Japan’s $1.5tn Government Pension Investment Fund, which provides its head Masataka Miyazono lots of sway within the monetary world. Attention naturally gravitates in the direction of asset managers like BlackRock, however huge “asset owners” like GPIF additionally assist set requirements for international markets. When it stripped an enormous mandate from BlackRock and gave it to Legal & General, it’s stated to have helped affect Fink’s choice to throw his weight behind the burgeoning ESG phenomenon.

Nicolai Tangen

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A former hedge fund supervisor was an odd alternative to steer Norway’s overwhelmingly passive $1.2tn Norges Bank Investment Management, however Tangen has thrown himself into the general public spokesman facets of the job. NBIM has lengthy excluded firms that it finds ethically incompatible with Norwegian state possession, however has turn into more and more vocal on a spread of points, and clear about the way it votes on a bunch of delicate topics.

Peng Chun

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While GPIF and NBIM will let its views be identified pretty publicly and repeatedly, the third asset proprietor on this record is diametrically totally different. China Investment Corp was arrange with $200bn in 2007 to diversify China’s international reserves, and is in the present day one of many world’s greatest sovereign wealth funds, with an estimated $1.2tn of property below administration. There’s little on-line on its chair and CEO Peng Chun — besides a reasonably basic technocratic profession by means of the Chinese banking business — however the dimension of the cheques he writes and China’s rising monetary would possibly make him an inescapable member of this group.

JOKER: Hamed Bin Zayed al Nahyan

The Abu Dhabi Investment Authority was arrange in 1976, the 12 months Mao Zedong died and when Norway was solely beginning to pump just a few barrels of oil out of the North Sea. Adia has subsequently been a serious participant in finance for for much longer than its Norwegian and Chinese counterparts.

But it’s smaller the opposite three asset homeowners on this record — whereas Adia has stayed schtum about its dimension, the Sovereign Wealth Fund Institute estimates its property at about $700bn — and by way of profile the funding group overseen by Sheikh Hamed is lately arguably outstripped by different Abu Dhabi funds like Mubadala.