What We Told Regulators About Common Ownership

The case for leaving index funds alone

Jan 15, 2019

Jasmin Sethi

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.

What is the problem with common ownership?

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 break up asset managers would hurt everyday investors

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.

What we told the FTC

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.

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