Investors and academics have often referred to BlackRock, Vanguard, and State Street Global Advisors as the Big Three asset managers. As huge providers of index funds, clients of these three managers are among the largest owners of publicly traded companies, raising concerns about their influence, including stewardship challenges.
But recent research suggests that grouping these three managers together and using the Big Three shorthand obscures significant differences between them and leads to misperceptions, including variances in corporate governance practices and these firms’ approaches to investments focused on environmental, social, and governance goals.
In a recent paper, Dorothy Lund, an associate professor at the USC Gould School of Law, and Adriana Robertson, a law professor at the University of Chicago Law School, said it’s a mistake to equate the term Big Three with giant asset managers. First and foremost, the three managers have different ownership and corporate structures, and this can result in disparate outcomes as far as their approaches to money management and corporate governance are concerned.
Take BlackRock, for one. “BlackRock is, in some ways, the asset manager with the simplest (and most transparent) corporate structure,” the paper said. Institutions own more than 75 percent of BlackRock’s shares. The firm also has a conventional governance structure characterized by a single share class, the absence of a staggered board, and proxy access for shareholders.
The authors added that it’s a mistake to equate the Big Three with passive investing and index funds. “Although they are major providers of index funds, the Big Three asset managers also control trillions of dollars in actively managed funds and differ substantially from one another in important ways,” according to Lund and Robertson. In addition, the authors said it’s important to distinguish between the terms passive funds and index funds.
As the authors wrote in the report, “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,”9 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.”
The three managers also differ significantly in their proxy votes on environmental, social, and governance issues. According to Lindsey Stewart, director of investment stewardship research on Morningstar’s global manager research team, in the trailing 24 months ending March 31, BlackRock and State Street Global Advisors supported twice as many key ESG resolutions as Vanguard did.
“BlackRock, Vanguard, and State Street are often lumped together for the purpose of considering large passive managers within the U.S.,” Stewart told Institutional Investor. But when it comes to proxy voting on ESG issues, the three managers diverge in their approaches, due to their different client bases.
“Vanguard, in particular, has a much lower exposure to institutional assets compared with the other two managers,” Stewart said. “I would say [its clients] were probably a lot more affected by the anti-ESG sentiment. It’s probably just taking a bit of a different approach [when it comes to] what it considers to be financially material and what their clients want to prioritize.”
The use of the term Big Three has also led some investors to overlook or downplay the role of other large asset managers, such as Fidelity, according to the paper. With more than $4.2 trillion in assets, Fidelity manages more capital than State Street Global Advisors ($4.1 trillion), “yet it receives only a fraction of the attention of the Big Three,” the paper said.
“Because Fidelity has a significant active management practice, it gets discussed separately,” Stewart said, adding that the Big Three are better known for their index-based products. But according to the paper, to think of the Big Three solely as passive fund managers is a misconception, because each of the three managers also handles substantial amounts of active funds. Furthermore, the index funds they provide are diverse and far from uniform in nature.
