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
A robust literature describes the incentives and stewardship practices of the “Big Three” asset managers (BlackRock, Vanguard, and State Street Global Advisors), often referring to these asset managers as “passive.” This is so common that the “Big Three,” “index fund,” and “passive manager” are used almost ...
Who are the big three index funds? ›
Crucially, this large and growing industry is dominated by just three asset management firms: BlackRock, Vanguard, and State Street. In recent years they acquired significant shareholdings in thousands of publicly listed corporations both in the United States and internationally.
How much of the S&P 500 do the Big 3 own? ›
Prior research has established that the Big Three combined own an average of 20.5% of outstanding shares for S&P 500 companies, with Vanguard owning 8.8%, BlackRock owning 7.1%, and State Street owning 4.6% of such shares.
What big three index fund managers play a dominant role in corporate America? ›
Along with BlackRock and State Street, Vanguard is considered to be one of the Big Three index fund managers that play a dominant role in corporate America.
What are the 3 main asset management types? ›
The three main asset types are equities (stocks), fixed income (bonds) and cash. Every investor should be familiar with these types of assets when considering an investment strategy. When building a portfolio, a primary goal is to end up with a diversified mix of two or three of the main investment asset types.
Who are the big 3 companies? ›
MBB is a shorthand way to refer to the “Big 3” strategy consulting firms, McKinsey & Company, Boston Consulting Group, and Bain & Company.
What index fund does Warren Buffett like? ›
Instead, he has consistently told investors to buy an S&P 500 index fund. "I recommend the S&P 500 index fund, and have for a long, long time to people. And I've never recommended Berkshire to anybody," Buffett said at Berkshire's annual shareholder meeting in 2021.
Which is better, Vanguard or BlackRock? ›
If you're looking for an option that lets you play a hands-on role in your investing decisions, Vanguard might be the better option. If you're looking for passive options, either firm could be the answer.
Does BlackRock own Vanguard? ›
Vanguard is owned by its different funds, which are owned by its shareholders. The company has no other owners than its shareholders, which sets it apart from most publicly traded investment firms. Vanguard Group is the second-largest investment firm in the world after BlackRock.
Who owns the most of Vanguard? ›
Vanguard is owned by its member funds, which in turn are owned by fund shareholders. With no outside owners to satisfy, this structure ensures business and portfolio management decision focuses squarely on meeting the investment needs of our investors.
Highest Rated S&P 500 Companies
| Company | Ticker | Credit Rating |
|---|
| Johnson & Johnson | (JNJ) | AAA |
| Microsoft | (MSFT) | AAA |
| Alphabet | (GOOGL) | AA+ |
| Apple | (AAPL) | AA+ |
6 more rowsAug 2, 2023
No one person or company owns BlackRock. Five institutional investors -- Vanguard, BlackRock, State Street, Bank of America, Vanguard, and Temasek -- own about 25% of the company's stock.
Do active managers beat index funds? ›
Morningstar found that from 2014 to 2023, just one in every four active funds beat its average indexed peer. And index funds dominated active funds in the largest categories.
How many mutual fund managers beat the S&P 500? ›
Over the past decade, an annual average of only 27.1% of actively managed funds benchmarked to the S&P 500 beat it. There are a few reasons why stock pickers are stinking up the joint worse than they normally do.
How many fund managers outperform the index? ›
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.
Who are the top 3 global asset managers? ›
Largest companies
| Rank | Firm/company | Country |
|---|
| 1 | BlackRock | United States |
| 2 | Vanguard Group | United States |
| 3 | UBS | Switzerland |
| 4 | Fidelity Investments | United States |
16 more rowsFund managers BlackRock, Vanguard and State Street do not technically own a majority share of the U.S. stock market. Their funds dominate the passive ETF and mutual fund markets, however, giving the three companies a potentially concerning amount of voting power and control over how U.S. companies operate.
What are the big three companies that own everything? ›
Table of Contents. Hello, everyone! Today, I want to talk about how you can still make a difference, even when it seems like three massive companies are taking over the world. Together, Vanguard, State Street, and BlackRock manage over $22 trillion—more than the GDP of most countries.
