The Curse of Size
Is bigger always better?
In America we are accustomed to think that the larger something is, the better. Larger companies tend to have broader product lines; larger cities offer more cultural amenities; larger markets are usually more diversified. But sometimes size can be a hindrance to doing business.
Recently Blackrock, the $3.6 trillion money manager (that sponsors the iShare family of Exchange Traded Funds) was rebuffed when it offered to perform the stress-testing for Spain’s banks. Blackrock has made no secret of its desire to purchase Spanish assets; Spain’s economy minister feared the firm might be conflicted. “How can you be both the referee and a player?” he inquired.
Of course, conflicts have been a stock-in-trade among large financial firms from the moment the first underwriter sought to unload a troubled asset on an unsuspecting investor. That’s one reason why Finra, Wall Street’s self-regulatory body, is initiating a top-to-bottom review of conflicts within brokerage firms.
But more than just the endemic conflicts that plague larger firms, size creates complexity that can be difficult to manage. GE’s financial arm started out as a vehicle for the company to facilitate sales of big-ticket items like jet engines and MRI machines, but it grew during the go-go ‘90s to become one of the most powerful financial firms in the nation. Their extensive commercial real estate book almost brought down the entire company in 2009.
Theroux exhorted us to “simplify, simplify.” Sometimes the best way to grow is to shrink first.
Douglas R. Tengdin, CFA
Chief Investment Officer
Follow me on Twitter @tengdin