The Power Shift: What Do You Own?
Exploring how institutional investors shape corporate decisions and global financial markets. Understand their impact on stock market trends and corporate governance.
Have you ever pondered the impact that institutions have on the decisions of large corporations and governments? Have you thought about who governs the substantial flow of money in global financial markets? It might be worth considering.
Rise of Institutional Investors
Institutional investors, such as private equity funds, hedge funds, and mutual funds, have gained significant influence over the past few decades, driving the financialization of corporations. This shift can lead to significant changes in how corporations operate, often prioritizing financial gains over long-term stability and broader economic health.
The financialization of corporations refers to the increasing influence of financial markets, financial institutions, and financial elites over corporate strategies and operations.
Rise of Institutional Ownership: Institutional investors’ share of the stock market has grown steadily. In the 1960s, they owned about 10% of U.S. equities, but by 2020, this figure had risen to around 75%.
Decline in Individual Ownership: Conversely, individual investors’ share has decreased. In the 1960s, individuals owned about 90% of the market, but this has fallen to around 25% today.
In the US stock market, the major holders of stocks are primarily large institutional investors. The three biggest players are:
BlackRock
Vanguard Group
State Street Corporation
Often referred to as the "Big Three" of index fund managers, they all play a pivotal role in the investment realm. BlackRock stands as the world's largest asset manager, boasting around $10 trillion in assets under management by the close of 2023. Vanguard follows closely with approximately $9.3 trillion in global assets under management as of May 2024. State Street, though smaller in comparison, still oversees a considerable $3.7 trillion and holds $40.0 trillion under custody and administration. These entities lead the investment sector, offering services that span investment management, asset management, and risk management. Their influence is underscored by the vast assets they manage and their significant presence in global financial markets.
The influence of the "Big Three" asset managers—BlackRock, Vanguard, and State Street—is profound within the stock market due to their extensive holdings across numerous companies. They wield considerable power in corporate governance and shape market trends, as they hold a substantial share of votes at company shareholder meetings. The potential they have to sway competition and market dynamics has sparked concerns, particularly due to their shared ownership in competing firms. Nonetheless, their provision of diversified index funds has been instrumental in democratizing stock market investments, enabling individual investors to gain entry into the financial markets.
BlackRock CEO Larry Fink’s statement in 2017 during an event where the executive admitted that the firm was trying to “force change” in companies.
“Well, behaviors are going to have to change, and this is one thing we’re asking companies. You have to force behaviors. And at BlackRock, we are forcing behaviors,” Fink said.
Major Holdings
These firms hold collective ownership in a substantial segment of publicly traded companies in the US. Examining the ownership structure of some of the top market cap stocks reveals this trend.
AAPL - 62% Institutionally Owned
MSFT - 74% Institutionally Owned
NVDA - 70% Institutionally Owned
AMZN - 70% Institutionally Owned
META - 80% Institutionally Owned
LMT - 74% Institutionally Owned
Do you see the trend? I suggest exploring various companies to discover the principal shareholders. Indeed, these three titans are the predominant shareholders in about 88% of the S&P 500 firms.
If you really want to truly expand your imagination, investigate the principal shareholders of these institutions. Hint - I’ve already told you their names.
What do you actually own?
When you opt to invest in index funds, you're essentially buying shares of the fund, rather than the individual stocks it represents. The index fund, which is managed by an asset management company, possesses the actual stocks that constitute the index.
Ownership and Voting Rights
1. Economic Ownership: As an investor, you have an economic interest in the performance of the underlying stocks. Your returns are based on the collective performance of these stocks.
2. Legal Ownership: The index fund is the legal owner of the stocks. This means the fund, not the individual investors, holds the voting rights associated with the shares.
3. Voting Rights: The fund managers exercise the voting rights on behalf of the investors. This gives them significant influence over corporate decisions and governance. For example, large asset managers like BlackRock, Vanguard, and State Street have substantial voting power due to the vast amounts of assets they manage.
Implications
Influence on Corporate Governance: Fund managers can vote on important issues such as board elections, executive compensation, and corporate policies. This can shape the direction of the companies in which the fund invests.
Potential Conflicts of Interest: There can be concerns about whether fund managers always act in the best interests of the investors, especially when voting on issues that might affect their own business interests.
So what do you own?
By investing in an index fund, you acquire shares within it. You own the shares. Consequently, the returns you receive are directly tied to the performance of the companies that comprise the index. As an investor in these funds however, you don't receive voting rights or the ability to participate in company decisions or governance; your influence is essentially non-existent. The concept of a "free market" is, in practice, not applicable.
While you may opt out of index funds, they remain the simplest form of passive investment. Alternatively, investing in individual companies on your own, that align with your values, grants you voting rights. However, this influence is negligible unless you're among the wealthiest 10% of Americans who own approximately 93% of all stocks. Not to mention the individual risk for the average investor in picking the ‘right’ stocks. These wealthy individuals, along with fund managers, possess considerable sway over global events.
So are we in a capitalistic society or a corporatism one? That is a discussion for another day.
So what next?
I am not opposed to the rise of institutional investors, as they have enhanced market liquidity and simplified passive investment for the average individual. Nevertheless, we must acknowledge our 'lack of control.' Engaging in the market is crucial, regardless of personal grudges or adverse views. Idle money merely loses value, resulting in wealth erosion. Yet, there is one realm where the participation of all is on par with those in power – exercising voting rights at the polls.
Exercising your voting rights is a cornerstone of democracy, allowing individuals to influence the policies and leaders that shape their society. It's a powerful form of expression and accountability, ensuring that elected officials represent the interests of their constituents. Moreover, voting is not just a right but a civic duty, reflecting one's commitment to the community and the nation's future. As history has shown, every vote can make a difference, and the collective outcome of an election can have far-reaching implications, both domestically and internationally.
Every individual is entitled to one vote. Thus, whether it's you or a wealthy individual wielding influence, the number of votes remains the same: ONE. In this respect, there is equality. It's crucial to think critically, conduct thorough research, and seek knowledge. Ultimately, it's the citizens who possess the power to enact change, but it requires steadfast effort to achieve substantive transformation in the society they wish to partake in.
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