Within the world of corporate governance, there has hardly been a more important recent development than the rise of the ‘Big Three’ asset managers—Vanguard, State Street Global Advisors, and BlackRock. Due to the popularity of index funds and ETFs, these asset managers now represent some of the largest owners of US public companies. And because of their size and corporate governance influence, a robust scholarly literature has identified the promises and perils of Big Three ownership. In a new book chapter, we identify a series of proxies, or shorthand terms, that first appeared in the foundational works in this literature and have become commonplace in both scholarly articles and the financial press. We further show how this shorthand can contribute to misperceptions and confusion.
The first shorthand is the use of the term ‘Big Three’ to refer to three distinct asset managers. Each of the Big Three manage vast amounts of money in indexed products—amounts that have grown dramatically thanks to the rising popularity of index-based investing. However, there are important differences between each asset manager, both in terms of the composition of the assets they manage and their own institutional structure and operations (and our chapter describes these differences in detail). As such, it does not always make sense to lump these institutions together. The focus on these three institutions has also limited scholarly focus in important ways. For example, the term excludes Fidelity, even though it is larger than State Street in terms of AUM and has also benefitted from a steady inflow of investor funds over the past several years.
The second shorthand is to equate the Big Three with ‘passive’ funds. This misperception is widespread, with many papers—including prior work by one of us—studying the Big Three’s governance practices to better understand the incentives of passive fund managers. Although this shorthand can be useful under certain circ*mstances, we show that it has important limitations. After all, each of the Big Three also manage large amounts of active money, and the index funds that they offer are themselves far from hom*ogenous.
This brings us to the final shorthand—the idea that ‘index funds’ are all passive and interchangeable. 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,’ 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. As such, the active/passive dichotomy that is used both by scholars and portfolio managers to market their mutual funds obscures important features of this market.
The final section of our chapter discusses the implications of these observations for future scholarship. Taken together, they shed light on conversations about how the rise of ‘passive’ investing affects corporate governance. Beyond scholarly relevance, these observations matter for policymakers seeking to respond to these market developments with legislative action. For example, the INDEX Act, a bill recently introduced in the Senate, would require investment advisers to pass through the votes of ‘passively managed funds,’ defined as any fund that tracks an index or discloses that it is a passive fund or index fund. As we show, this definition sweeps ‘closet active’ funds under its umbrella.
Our analysis also sheds light on other pressing corporate governance conversations, and in particular, those about the growth and appropriate role of large asset managers. We chart these implications in further detail and highlight questions for future research.
Dorothy Lund is Associate Professor of Law at USC Gould School of Law.
Adriana Z. Robertson is the Donald N. Pritzker Professor of Business Law at the University of Chicago Law School.
This post is part of an OBLB series on Board-Shareholder Dialogue. The introductory post of the series is available here. Other posts in the series can be accessed fromthe OBLB series page.
FAQs
The “Big Three” institutional investors, BlackRock, State Street Global Advisors and Vanguard, have significant influence on the environmental, social and governance (ESG) policies and related disclosure for public companies.
What are the big 3 index funds? ›
The rise of index funds has provided millions of Americans with a cheaper and more efficient way to invest. With more than $23 trillion in assets between them, BlackRock Inc., Vanguard Group Inc. and State Street Corp. have become the top shareholders in many US-listed companies.
Who are the big three asset management companies? ›
Along with BlackRock and State Street, Vanguard is considered to be one of the Big Three index fund managers that play a dominant role in corporate America.
What is the Bogle recommended portfolio? ›
Building a Solid Foundation: The Boring Money Account
The core of Bogles recommended portfolio is having a boring money account invested primarily in index funds. Bogle suggested putting at least 95% of investable assets into low-cost, diversified index funds.
Who is the number 1 investor? ›
Warren Buffett is widely considered the greatest investor in the world. Born in 1930 in Omaha, Nebraska, Buffett began investing at a young age and became the chairman and CEO of Berkshire Hathaway, one of the world's largest and most successful investment firms.
Who founded BIG3? ›
Founded by producer, actor, and music legend Ice Cube and entertainment executive Jeff Kwatinetz, the BIG3 combines highly competitive, physical, fast game experiences and incredible fan experiences.
What is the Lazy 3 fund portfolio? ›
Three-fund lazy portfolios
These usually consist of three equal parts of bonds (total bond market or TIPS), total US market and total international market.
What is a 3 fund portfolio for retirees? ›
With the three-fund approach, you allocate a certain percentage of your portfolio to one of three asset types: U.S. stocks, international stocks, and bonds. Older investors, including those near or in retirement, tend to prioritize capital preservation.
Should I invest in index funds now? ›
Any time is good for investing in index funds when you plan to hold the fund for the long term. The market tends to rise over time, but not without some downturns along the way, thanks to short-term volatility.
Who is the best asset manager? ›
The top 5 of asset managers included in this ranking are BlackRock, 9,464 US$b, (They hit 10tn AUM as per December 2021), Vanguard, with 8,400 US$b, UBS Group, one of two European Asset Managers who made the Top 10 with 4,432 US$b, Fidelity with 4,230 US$b, and State Street Global Advisors with 3,860 US$b.
BlackRock
| Headquarters at 50 Hudson Yards, New York City |
|---|
| Net income | US$5.502 billion (2023) |
| AUM | US$10.01 trillion (2023) |
| Total assets | US$123.2 billion (2023) |
| Total equity | US$39.35 billion (2023) |
17 more rowsRankings by Total Managed AUM
| Rank | Profile | Managed AUM |
|---|
| 1. | BlackRock | $10,470,000,000,000 |
| 2. | Vanguard | $8,700,000,000,000 |
| 3. | Fidelity Management & Research | $3,880,000,000,000 |
| 4. | The Capital Group Cos. Inc. | $2,500,000,000,000 |
92 more rowsWarren Buffett's stock purchases in the most recent quarter include Chubb Limited (CB) and Occidental Petroleum (OXY). HP Inc. (HPQ) and Paramount Global (PARA) are among Warren Buffett's stock sales in the most recent quarter. The Berkshire Hathaway portfolio includes 41 stocks as of May 2024, including Apple Inc.
What is the number 1 rule investing? ›
Warren Buffett once said, “The first rule of an investment is don't lose [money]. And the second rule of an investment is don't forget the first rule.
What does Warren Buffett recommend for the average investor? ›
Key Points. Warren Buffett made his fortune by investing in individual companies with great long-term advantages. But his top recommendation for anyone is to buy a simple index fund. Buffett's recommendation underscores the importance of diversification.
Who is the biggest investor in us? ›
According to data from the U.S. International Trade Administration, the main investing countries in the U.S. are Japan (USD 721 billion), Canada (USD 607.2 billion), Germany (USD 498.6 billion), and the United Kingdom (USD 439 billion), with Europe as a whole accounting for USD 2.8 trillion.
What are the 4 biggest investment companies? ›
BlackRock, Vanguard, Fidelity, State Street Global Advisors, and J.P. Morgan Asset Management are the five largest financial advisory firms in the United States, ranked by assets under management (AUM).
Who owns BlackRock? ›
Who owns BlackRock? BlackRock is not owned by a single individual or company. Instead, its shares are owned by a large number of individual and institutional investors. The biggest institutional shareholders such as The Vanguard Group and State Street are merely custodians of the stock for their clients.
Who came up with the 3 fund portfolio? ›
Overview. The Three-Fund Portfolio was created by Taylor Larimore after being inspired by the writings of Jack Bogle to simplify the investments from his own complex mix of 16 different funds to something much more sustainable.
