Magnetite, Naval Forces and A Warning
These associations may have you scratching your head. I’ve taken creative liberty in freely tying the literal definitions to the names of the two largest investment management companies in America, BlackRock and Vanguard. More money is now managed in passive than active US equity funds. This eclipse happened in July of 2019 but has spent decades in the making. Stay tuned for the warning.
Assets Under Management (AUM) are listed below just to provide a sense of magnitude for sizing their influence. Below that is their operating revenue.
Notice that AUM and revenue differ by factors of 500 and 1000. This highlights the low cost associated with index investing as compared to managed assets. For good reason, low fees and a sense of security delight customers. However, there exists one other axiom — these companies gain the power of influence by roughly those same factors.
BlackRock
Assets Under Management (AUM): >$10 trillion (2022)
Revenue: ~$20 billion (2021)
BlackRock could fit many possible definitions but I’m particularly drawn to the BlackRock of New York’s Black Rock Forest. This forest largely consists of the gneiss bedrock Magnetite (the Black Rock of the Forest), a high grade metamorphic rock composed of the minerals feldspar, quartz, amphibole, pyroxene, and mica.
Draw any inference you wish on the similarities between the magnetic pull of magnetite and the influence BlackRock (the company) exudes globally. Surely, there is a price to pay for such influence in the hands of only a few.
Vanguard
Assets under Management (AUM): >$7.5 trillion (2021)
Revenue: ~$7 billion (2020)
Vanguard, the noun, is defined as:
- the forefront of an action or movement
- the foremost part of an advancing army or naval force.
Nothing about either definition implies “passive” to me. We the people hand our power to this small, likely conspiring, cohort of power influencers. Take the 2017 share of BlackRock and Vanguard in the image below. These are the corporate investment world’s equivalence to the U.S. populations of California and Texas, and then some.
The power given away by passive investors to passive index funds
These companies have, in fact, publicly declared that they seek to exert influence. William McNabb, chairman and CEO of Vanguard, said in 2015 that, “In the past, some have mistakenly assumed that our predominantly passive management style suggests a passive attitude with respect to corporate governance. Nothing could be further from the truth.”
When [the below listed individuals] analyzed the voting behavior of the three large investment firms, [they found] that they coordinate it through [centralized] corporate governance departments. This requires significant efforts because technically the shares are held by many different individual funds.
Hence, just three companies wield enormous potential power over corporate America. Interestingly, though, we found that the Big Three vote for management in about 90% of all votes at annual general meetings, while mostly voting against proposals sponsored by shareholders (such as calls for independent board chairmen). [5]
I admit to clinging to a secret wish under tough economic conditions. That wish was that those illusive connections among the powerful, and their ranks within the Federal Reserve, act as an insurance policy in such times with my best interests at heart. Reflecting on this, feeling a sense of disdain, I assure myself of one lesson taught by COVID:
When markets crash, those with most get more and those with least better salvage what remains for them.
The Warning
There exists no reason a stratospherically wealthy person needs to limit investments to only one of these firms. You and your paltry 401k may be confined to the limited options granted by your employer, but not them. No, some rat-nested threading through these companies likely exists begging for a puppeteer.
Each investment house exists primarily as just a legal boundary afterall, filled with employees hungry to attract and maintain their high net worth individual (HNWI) clients. A double and triple dealing (or more) of HNWI accounts among each investment firm could easily serve as a means for the extremely wealthy to stratify their influence. In so doing, they could leverage that “free” influence you (the passive investor) have relinquished. This trick permits to them even greater power than their already immense fortunes permit.
A HNWI’s control could then permeate throughout corporate, and even the political, architectures of America. Perhaps it isn’t tasteful to label this control, instead we’ll call it “the interest of the common good”. At least that’s what Xi Jinping calls it.
But of course, take all this with a grain of salt. These words are only conjecture, there is no way it could actually be happening, right?
Conclusion
The prudence and sincerity of individual passive investors are qualities I fully concede. Yet, I also understand that every tradeoff comes at a cost. By investing passively in mass we gain low fees and secular diversification; by the same coin, we lose our participation with decisions made and/or consequences enforced. In my view, this is not a worthy trade-off for the illusion of security.
You vote with your dollar, diversify and evolve beyond just the index fund.
Thank you
[2] https://www.blackrockforest.org/about/geology/
[3] https://www.investopedia.com/articles/investing/110515/who-are-owners-vanguard-group.asp
[4] https://www.merriam-webster.com/dictionary/vanguard
[5] https://theconversation.com/these-three-firms-own-corporate-america-77072
