What We Told Regulators About Common Ownership
Written by Jasmin Sethi for SCA client, Morningstar.
Recently, the Federal Trade Commission joined the SEC and the Department of Labor as another agency concerned about investor welfare. Unlike the Labor Department and the SEC, the FTC is considering what common ownership by asset managers might mean for consumers—that is, whether it leads to higher prices. This topic is one that has drawn interest from policymakers, academics, and the media for more than three years, and we believe that it's one the industry should continue to monitor.
What is the problem with common ownership?
The FTC is evaluating theories relating to common ownership, which occurs when shareholders hold equity in competing companies. Academics have argued that common ownership by large asset managers, such as BlackRock, Vanguard, and State Street, leads to higher prices for consumers. Morningstar has previously argued that the academic theories do not correctly explain some of the trends they purport to explain, and the issues are being hotly debated in academia, with prominent academics on both sides of the argument.
Policy proposals to break up asset managers would hurt everyday investors
Policy proposals to combat these alleged anticompetitive effects include dismantling index funds altogether and remedies that would impact active mutual funds as well. In a recent article, my colleague explored the ramifications of policy proposals such as limiting holdings to 1% of a company. There's likely more harm than good to come from regulating index funds when the harm is unclear; some have estimated that common ownership has led to increases of 3% to 7% in consumer airline ticket prices, but this work has been criticized by other academics as flawed in its methodology and, therefore, not reliable for its results.
