It’s easy to underestimate big things.
Can you guess who’s the biggest? Source: IMF
We hear a list of 4 or 5 items, and we tend to average them, treating them alike. But things aren’t all alike. In the global economy, the United States and China dominate every other nation. Together, our two countries total 40%. The next largest country is about 5%. Clearly, if we want to understand what’s going on the economy, we need to focus on the US and China.
Or look at stocks. The 4 biggest companies comprise 10% of the market. Their performance dominates everyone else. That’s why what happens in technology is so important: Apple and Google (“Alphabet”) and Microsoft and Facebook have a huge impact of market-cap-weighted averages, like the S&P 500. If Apple has a bad day, almost everyone will have a bad day.
So I wasn’t surprised when I heard that the four biggest institutional investors—Blackrock (iShares), Vanguard, State Street, and Fidelity—own over half the US stock market. Concentrations happen. We should note that these investors aren’t the final owners. Most of those shares are held for the benefit of others—these big shareholders are fiduciaries.
They don’t really control their holdings—they hold their shares for the benefit of the ultimate owners. They do exercise control, though, in one important matter: they vote. The custodian is responsible to vote on proxies, shareholder proposals, mergers and acquisitions, and all kinds of other questions. And corporate democracy isn’t like representative democracy. It’s not one-person-one-vote. It’s one-share-one-vote.
Photo: Micheal Jarmoluk. Source: Pixabay
Vanguard—who owns 20% of tradeable US shares—gets 20% of the votes. They may be passive in their investment style, but they’re not passive in their voting. They have 22 people dedicated this process. Other institutions also have staff whose sole job is to evaluate various issues. The implications are staggering. Any shareholder initiative, any significant adjustment in capital structure, any change in board composition has to receive the blessing of these proxy voters.
So here’s a little-discussed side-effect of the rise of indexing and agency-capitalism. Increasingly, the fate of our multi-trillion dollar corporate world will be decided by a few hundred analysts. Interesting, isn’t it? Size matters.
Douglas R. Tengdin, CFA
Chief Investment Officer