We live in a remarkable world. As of July 20 2021, three asset managers, BlackRock, Vanguard Group and State Street Corp. collectively owned about 22% of the average S&P 500 company, according to data compiled by Bloomberg, up from 13.5% in 2008.

Asset manager capitalism

My friend Prof Mark Blyth (Brown) – who needs no introduction, but is fantastic and an essential follow – gave this great short talk the other day on the theme of asset manager capitalism and inequality. It is, as you would expect highly recommended!

Mark features the work of our brilliant colleague Benjamin Braun. No that’s not a BlackRock exec, that’s Ben looking sharp! (And that’s Mark in the top right-hand corner)

Literally everything that Ben does is fascinating and his twitter account is an endless source of other good things to read. He is a great guide to the current scene in critical studies of finance etc. Here’s the description of Ben’s research on asset manager capitalism with links to two papers.

Financial capital has become abundant in the global economy. The logic of supply and demand would suggest that wealth owners and their financial intermediaries should see their structural power decline. Paradoxically, the ultimate gauge of rentier power – the gap between the rate of return on capital (r) and the rate of economic growth (g) – has proven remarkably resilient since the 1980s. Why did this gap not shrink? The guiding hypothesis of this project is that the power of wealth owners is partly a function of the organization of finance. The project studies the rise of different types of asset managers – firms that pool and manage “other people’s money” – and their impact on the economic and political determinants of the rate of return on capital. American Asset Manager Capitalism [2021] studies the rise of large asset managers in the United States and the consequences for the political economy of corporate governance. From Exit to Control [in progress] argues that the rise of asset manager capitalism means that the primary mechanism underpinning the structural power of finance has shifted from exit to control. However, asset manager capitalism differs from early 20th-century “finance capital” because unlike the banks studied by Hilferding, today’s asset management giants combine control with diversification.

Source: Braun 2021

In this flow chart the key point to recognize is how asset managers earn their money. It isn’t through the returns of the corporations they invest in, but through the fees paid to them by institutional investors who aggregate the funds of households, corporations, governments etc. Those fees, of course, will ultimately only roll in if the asset managers earn good returns. But, if you stripped this down, the households could ultimately own the assets themselves. Adding the intermediation, advice, expertise, reduction of complexity etc etc is the key to the entire business.

Universal Owners

Asset managers are mediated owners. They are mediated also as a result of the sheer size of their portfolios. They are radically diversified, owning slices of practically every corporation worth anything. But their bulk means that their ability to exit stock is limited. They are simply too big. In this 2021 paper Braun develops a typology of historical models of ownership and control.

Like a robber baron, BlackRock has achieved a high concentration of ownership. Unlike a robber baron it has a huge diversification of what it owns and a limited interest in any particular bit of its portfolio. This somewhat paradoxical state of being into everything and unable to get out, gives rise to the idea that asset managers are what is called “universal owners”.

On the history of the concept of “universal owners” this paper by Mercer Investment Consulting from back in 2006 is interesting:

“Universal ownership” is a term coined by Bob Monks and Nell Minow in Corporate Governance in 1995 to describe an institutional investor owning such a wide range of asset classes distributed among economic sectors that the organization effectively owns a slice of the broad economy. The authors recognized that the “Pension Fund Revolution” described by Peter Drucker in 1975 was well under way. In the United States, by 2005 the 100 largest institutions and managers owned 52 percent of all publicly held equity. Not only do institutional investors own a majority of the public equity of the world, but through that ownership, their success as investors is dependent on the performance of the economy at large. Large owners who own a representative “slice” of the economy are more dependent on general macroeconomic performance than on the performance of any one stock or portfolio.

ESG

As universal owners, the new “moral money”, Environmental Social and Corporate Governance agenda is a perfect fit for asset managers. But what does it amount to? The suspicion must be that

a. it is a PR boondoggle/greenwashing

or b. if it is not a boondoggle (since an actual climate crisis might really be bad for global capital), then the involvement of the universal owners will come at a price.

On the actual voting behavior of BlackRock, Vanguard and State Street as universal owners, this new working paper is essential reading.

Derisking

On the question of what price Larry Fink demands, THE INDISPENSABLE person to follow is, of course, Daniela Gabor. I’ll do another post at some point introducing Daniela’s agenda. But if you haven’t already, add Gabor along with Blyth and Braun to your regular reading.

What BlackRock wants is exorbitant. It wants the public balance sheet to step in backstop any risks that asset managers might be running in making serious ESG investments. And because BlackRock is a huge universal owner, when it asks for a public backstop it means the public balance sheet of the world – no kidding! Larry Fink of BlackRock has made clear, repeatedly, that he wants all the capable governments of the world to pitch in to increase the loss absorption capacity of the IMF and World Bank balance sheets.

It is almost as though someone at BlackRock has been reading the Communist Manifesto and is asking themselves: Where is that “committee for managing the common affairs of the whole bourgeoisie” that we were promised? And no, a 1990s-style ad hoc combo of Greenspan-Summers-Rubin won’t do the trick. Universal owner → universal public backstop please!

A preliminary climax of this agenda was reached in November 2021 at COP26 with Mark Carney’s announcement that he had rallied $130 trillion in institutional funds behind driving the drive to energy transition.

Prof Gabor has developed an entire interpretation of the political economy of our current moment in terms of the political economy of “derisking”. Here is an excellent talk she gave around COP26.

In this key slide Daniela summarizes the fundamental different in political economy produced when government conceives its role as being essentially to derisk investment by gigantic private asset managers.

For Daniela’s roundup on COP26 check out this short essay on the great Phenomenal World blog.

So … how did we get here?

Investigative journalists all over the world have been after the BlackRock story.

Back in 2018, the award-winning reporting team at Investigate Europe did this excellent report.

Deal of the Century

The bit that interests