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2 Months : From Oct 2019 to Dec 2019
By Dawn Lim
The biggest U.S. money managers are working to convince Washington that they don't harm competition among corporations as a debate about their sway has caught the attention of regulators.
BlackRock Inc. and Vanguard Group have been getting in front of officials and disseminating research in an effort to quash concerns that large institutions' holdings of multiple companies in a single sector hurts competition.
In doing so, they are diving into a divisive debate on so-called common ownership. At issue is the broad ownership across companies in a given sector by investment firms like BlackRock and Vanguard, which combined manage nearly $13 trillion in investor money.
Many in the asset-management industry, government and academic circles say there isn't clear evidence of whether common ownership causes anticompetitive effects.
But the fear is that by owning chunks of many companies in a sector, say in airlines or banking, investors are influencing them to act in ways that maximize gains for all. That is opposed to pushing individual companies to compete more vigorously with rivals and undercut one another on price.
This could end up hurting consumers, some economists say. That possibility has gotten attention in Washington at a time when the power of financial firms is drawing fire from Democratic presidential candidates such as Elizabeth Warren and Bernie Sanders.
Staff at the Federal Trade Commission are evaluating studies of common ownership to help the antitrust enforcement agency decide how it will approach the issue. The FTC also is updating commentary on mergers of companies in a sector and has been weighing whether to include theories on how common ownership could harm consumers.
Justice Department antitrust chief Makan Delrahim in a May speech said he is following the debate around whether enforcement officials should use existing measures or new approaches to understand common ownership's effects.
Meanwhile, presidential candidate Sen. Amy Klobuchar (D., Minn.) has introduced a bill to get the FTC to study the effect of common ownership in certain industries. In hopes of staving off any potential legislation, the industry has been presenting its side to lawmakers. The Investment Company Institute, a fund-industry trade group, led a group of asset managers in meetings with lawmakers on the common-ownership issue in May 2018, people familiar with the matter said.
The scrutiny comes amid the rapid growth of a few firms thanks in part to the rising popularity of low-cost index funds that track markets and invest broadly across sectors. The biggest -- BlackRock, Vanguard and State Street Corp. -- now hold about a fifth of the S&P 500 through funds they run for investors.
That gives the firms considerable power over American corporations. They can cast pivotal votes that determine everything from who sits on a company board to how executives deal with issues ranging from climate change to pay equity.
As the companies have grown, they have had to fend off attacks that indexing could distort prices, or is " worse than Marxism." There is also concern that control over public companies will be concentrated in the hands of a few firms.
While no changes in U.S. antitrust policy or limits on asset managers are expected in the near future, the debate around common ownership has put the firms on the defensive.
This summer, a group from Vanguard met with Robert Jackson Jr., a Democratic commissioner at the Securities and Exchange Commission, presenting its own research showing that common ownership hasn't harmed competition. The findings sparked a spirited exchange over the firm's methodology, according to people familiar with the meeting.
Vanguard's study, published in August, looked at 200 industries and marked the first time the firm published a formal take on the issue. It started planning to become more proactive in 2018 after monitoring the topic for a few years, a person familiar with the matter said.
The firm is scheduled to revisit the issue with Mr. Jackson before he leaves office next year, according to people familiar with the matter.
The common-ownership debate bubbled up in 2014 as new research on the issue started rippling through academia and Washington.
BlackRock staffers had differing views on how to deal with the matter at first. Some thought the firm needed to be louder; others believed it should avoid fanning the discussions, according to people familiar with the matter.
BlackRock became more vocal in 2017. It questioned the validity of a study, originally circulated online in 2014, that kicked off the current debate around common ownership. That paper argued that as airlines are backed to a greater degree by investors with shares in rival airlines, ticket prices rise.
While several economists questioned the paper's methodologies, other academics cited it in calls to limit asset managers' investments in certain industries and restrict them to investing in just one company per sector.
BlackRock pushed the study's authors to release the code and data behind their work to help others replicate it in the lead-up to the study's official publication. The authors did so when the study was published in the influential Journal of Finance in 2018, as they had originally planned.
The firm also worked in 2018 with economic consulting firm Analysis Group to scrutinize the study. Analysis Group found fault with its methodologies; BlackRock included the findings in a letter to the FTC earlier this year. It shared another paper containing the research with regulatory officials over the past month.
In a statement, BlackRock said the study's authors were "aggressively marketing their research to media, regulators and policy makers" before their data and models were made readily available for others to test, and that "getting to the facts was critical to avoiding unnecessary harm to the millions of investors who count on diversified portfolios to fund their retirement and other goals."
Stefan Nagel, executive editor of the Journal of Finance, said the review process for the paper followed all procedures rigorously. Martin Schmalz, one of the paper's authors, said he welcomed debate about the work and alternative research designs.
BlackRock has said in regulatory filings since 2018 that its business could be hurt if policy makers took seriously calls for changes to the way asset managers are allowed to invest funds that they run on behalf of investors.
Write to Dawn Lim at email@example.com
(END) Dow Jones Newswires
November 12, 2019 05:44 ET (10:44 GMT)
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