Is the growth of Passive Investing distorting stock prices?

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The extraordinary growth of Passive Investing in recent years has resulted in the main Passive Managers – BlackRock, Vanguard and State Street – becoming some of the biggest investors in a disproportionate number of company stocks.

Recent research identified the scale that these ‘Big Three’ Passive Managers now control:

BlackRock, for example, had a 5% shareholding (or more) in about two thousand companies in the United States – out of only 3,900 publicly listed U.S. corporations.

Which means that BlackRock holds 5% blocks in more than a half of all listed companies in the US.

Vanguard had 1,855 five percent blockholdings worldwide, of which around 1,750 were in U.S. listed companies – accounting for 45% of all US listed companies.

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Amazingly, the ‘Big Three’ combined constitute the largest shareholding block in 1,662 companies – or 40% of all listed companies in the United States. And their mean ownership accounts for more than 17.6% in each of these companies.

Within the S&P 500 specifically, the ‘Big Three’ combined constitute the largest owner in 438 of the 500 most important American corporations – around 88% of all member firms.

These 438 corporations account for about 82% of S&P 500 market capitalization.

This is an enormous concentration of ownership, a concentration that is at risk of distorting the stock markets, the investment industry – and the way that CEOs and Corporate Boards need to manage and direct the companies that they represent.

Because, unlike Discretionary Investors, Passive Investors neither measure nor trade stocks based on Company Fundamentals.

They have limited engagement with the companies that they invest in.

And when Activists get involved, Passive Managers support Activists in around 50% of proxy votes.

This creates serious implications that companies must respond to as a matter of urgency – and fiduciary duty.

For much more detail about “The Rise of Passive Investing – and how Companies should respond”, you can download a complete, complimentary copy of our latest Reputation Report on the subject by clicking here.

Reputation is a Strategy Consulting Firm that provides personal counsel to Asia’s leading CEOs, advising them how to build and protect their company’s Market Value in the new world of business – and the new age of investing. 

If you would like to discuss how we can help you build and protect your company’s Market Value, please connect with us via our website or by email to Connect@TheReputationPartnership.com.

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