getTagNameMorningstarCorporate:blog/bigpicture
What We Told Regulators About Common Ownership
The case for leaving index funds alone
Recently, the Federal Trade Commission joined the SEC and the
Department of Labor as another agency concerned about investor
welfare. Unlike the Labor Department and the SEC, the FTC is
considering what common ownership by asset managers might mean for
consumers—that is, whether it leads to higher prices. This topic is
one that has drawn interest from policymakers, academics, and the
media for more than three years, and we believe that it's one the
industry should continue to monitor. The FTC is evaluating theories relating to common ownership, which
occurs when shareholders hold equity in competing companies. Academics
have argued that common ownership by large asset managers, such as
BlackRock, Vanguard, and State Street, leads to higher prices for
consumers. Morningstar has previously argued that the academic theories do
not correctly explain some of the trends they purport to explain, and
the issues are being hotly debated in academia, with prominent
academics on both sides of the argument. Policy proposals to combat these alleged anticompetitive effects
include dismantling index funds altogether and remedies that would
impact active mutual funds as well. In a recent article, my colleague explored the ramifications
of policy proposals such as limiting holdings to 1% of a
company. There's likely more harm than good to come from regulating
index funds when the harm is unclear; some have estimated that common
ownership has led to increases of 3% to 7% in consumer airline ticket
prices, but this work has been criticized by other academics as flawed
in its methodology and, therefore, not reliable for its results. We believe that this issue is not the domain of the FTC, certainly
not acting on its own. The SEC is the regulator in charge of the
securities markets, and this is a securities markets issue impacting
ordinary investors. According to our analysis of the Survey of
Consumer Finances data from 2016, 69% of the working population
(median income of $70,884) has exposure to the market, either through
a workplace-sponsored defined-contribution plan, an IRA, a brokerage
account, individual holdings of stocks, bonds, or mutual funds, or a
workplace-sponsored defined-benefit plan. Index funds are a critical
component of their retirement accounts. Policy solutions, therefore,
that impact these investments would have tremendous ramifications for
ordinary investors. The potential price effects, such as the increases
in the airline industry, might be dwarfed by the potential harm to
these same consumers who are investors in index funds. In our comment
letter to the FTC, we argue that this issue is not ripe for
policy remedies and the policy solutions would do more harm than good.
We note that other explanations of concentrated ownership and
potential anticompetitive outcomes are more plausible, such as wide
moats contributing to abnormal profitability. We think that any action, if needed, should be conducted by the SEC
and can be informed by the FTC. For instance, we recommend that mutual
fund disclosures be standardized so that the data can be easily
analyzed for patterns in asset-manager voting. Simply put, there is no case for the FTC to do anything at this
time. We are comforted to see that SEC Commissioner Robert Jackson was
invited to testify at the FTC hearings and agree with his point that
policymakers “need to be very wary of the emerging evidence that there
might be an anticompetitive effect here." We also share his
judgment that "we're at the beginning, rather than the end, of
that conversation as a matter of optimal policy." Given the significant consequences of any potential policymaking in
this area, we encourage asset managers to monitor and participate in
this conversation.Jasmin Sethi
What is the problem with common ownership?
Policy proposals to break up asset managers would hurt
everyday investors
What we told the FTC
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