By ALBINA GIBADULLINA
Spatial Inequalities of Asset Management Capitalism
Introduction
Since the 1980s, U.S. finance has grown disproportionately in power and influence, as American investment funds have become the largest shareholders in American corporations, managing tens of trillions of dollars in investments. This article provides a new empirical analysis of the rise of asset manager capitalism in the United States.
Indeed, he explores the extent of its global spread by examining the Form SEC of US institutional investors along with an extensive global corporate ownership dataset provided by Orbis. This article concludes that US finance owns approximately 60% of US listed companies (it was just 3% in 1945) and 28% of the equity of all listed companies globally.
As the largest global shareholders and exemplary US asset managers, the Big Three hold investments in 81% of US listed companies and own 17% of the US stock market, while appearing as shareholders in 20% of listed companies in stock markets outside the US and which own 4% of non-US companies stock market.
This article illustrates that the rise of the era of passive investing and universal ownership, exemplified by the activities of the Big Three (BlackRock, Vanguard and State Street), has produced a sectorally and geographically uneven landscape of capital flows, exacerbating existing divisions between the core and the interior of global financial markets. With ownership of listed companies increasingly concentrated in the hands of a small number of increasingly powerful funds, this article argues that it is in the ownership of the majority of global capital that the power of modern finance lies.
Financial growth
Since the 1980s, the American financial sector has grown disproportionately in terms of profit, power and influence. With high interest rates coming after financial deregulation and the monetarist turn, some of the earlier academic studies attributed the rising profitability of US finance to the rising profitability of US banks.
More recently, however, Benjamin Braun has suggested that the structural power of modern finance emanates from the large, illiquid and highly diversified equity holdings of investment funds – not from bank loans to non-financial companies. With ownership and capital management surpassing credit intermediation as the most profitable financial activity in the United States, the Wall Street Journal proclaimed that “banks have lost the battle for power on Wall Street” as “profits, assets and influence have shifted from investment banks like Goldman to money management giants like BlackRock and Vanguard.”
Today's most powerful financial intermediaries are no longer commercial or even investment banks, but asset management companies that have acquired historically unprecedented amounts of capital, while the emergence of financial institutions involved in investments has led to a deeper intertwining of capital industrial and financial.
In light of these rapid financial transformations, Auvray proposed that the post-2000 phase of financialization, characterized by low interest rates, high payments to shareholders, and centralization of financial ownership, needs to be conceptually demarcated from the previous phase of financialization of the 1980s-1990s, the which was extensively documented by Krippner.
Contemporary finance no longer appears to facilitate productive investment, which prolongs the ongoing period of secular stagnation. Therefore, some argue that despite this, finance continues to hold structural power, although the underlying bases of its power have fundamentally changed.
This article focuses on one aspect of the contemporary phase of financialization – the rise of asset management capitalism and its uneven geographic distribution across the world. I argue that as capital across all economic sectors is increasingly owned and managed by financial intermediaries, this has been one of the most significant, yet insufficiently understood, transformations observed in the US economy over the past four decades.
Initially called “investor capitalism” and “pension fund capitalism,” this phenomenon was largely driven by private pension funds throughout the 1970s and 1980s. However, by the mid-1990s, mutual funds had overtaken private equity funds. private pension companies as the largest shareholder of US corporations following a series of (de)regulatory changes.
Building on Rudolf Hilferding's analysis of finance capitalism in the early 20th century, Gerald F. Davis coined the term “new finance capitalism” to describe a system of corporate ownership that began to emerge in the 1990s in the United States, in which “ a small number of investment funds find themselves with substantial ownership positions in hundreds of corporations simultaneously.”
In 2014, Andrew Haldane, chief economist at the Bank of England, proclaimed that the “era of asset management may have arrived.” Braun later coined the term “asset management capitalism” to describe this new corporate governance regime dominated by index funds.
As asset managers continued to rise to prominence throughout the 2010s, scholars of international political economy began to devote their attention to the growing global influence of index funds and the consequences of the “reconcentration of corporate ownership” for the economy. from the USA.
At the same time, economic geographers began to examine the uneven and varied geographies of corporate ownership, as well as the way in which technological advances have reshaped the asset management industry. They found that it was necessary to make a “more systematic attempt to politicize contemporary property logics and the extractive financial schemes based on them”.
The owners of capital
In the United States, the changes in the ownership composition of listed companies are striking. O Federal Reserve estimates that at the end of World War II 95% of US stocks were held directly by American families; however, in 2020, this number fell to 40% as a new set of financial intermediaries emerged, which began providing investment advisory and asset management services (Figure 1). According to the Federal Reserve, since 1945, the share of shares held directly by US financial companies has grown from 3% to 40%.
Figure 1. Shareholding of U.S. listed companies owned by Different Types of Shareholders, 1945–2020.
Who owns American corporations?
How does the Federal Reserve classify so-called “private equity” and hedge funds in the “households” and “rest of world” categories, Braun estimates that the true share of corporate stocks owned by U.S. finance is likely to be at least 12% or 13% higher than reported. Along with exchange-traded funds (ETFs), mutual funds account for 27% of the American stock market, followed by 10% of shares held by private pension funds and government retirement funds.
The data from Federal Reserve provide long-term historical estimates of U.S. equity ownership that are not available elsewhere. However, it has several limitations, including understating the investment holdings of U.S. mutual funds, not providing a sectoral breakdown of their holdings, lumping all mutual funds together which prevents measuring the growing concentration of ownership, and finally , lack of comparative data from other countries. Given these limitations, researchers have relied on firm-level databases to study the emerging dynamics of asset management capitalism in the United States and around the world.
Although the literature on asset management capitalism is growing rapidly, this type of studies is still in its infancy. There are four primary methodological limitations prevalent in the literature that this article aims to address. First, because initial analyzes of corporate ownership data were largely spatial, this article aims to contribute to the growing comparative literature on financialization. It follows Torchinsky Landau examining national and transnational financial ownership ties and observing how they vary geographically.
Second, while most of the existing literature provides generalizations of corporate ownership dynamics based on analyzes of relatively small samples of companies (often limited to specific indices such as the S&P 500), this article examines all stock holdings of US institutional investors between 1997 and 2020 and all ownership data available for all listed companies globally in 2018.
Thirdly, although there is now a growing number of studies examining the impacts of financial ownership in specific sectors, such as agriculture, real estate, fossil fuels and the mining industry, as well as healthcare, to date, there is still a lack of studies that provide cross-sector comparisons of financial ownership.
To address this empirical gap, we use firm-level data here to develop sectoral estimates for the share of capital owned by U.S. financial firms, including the “big three” asset managers – BlackRock, Vanguard, and State Street – in the United States. USA and abroad. Finally, as insufficient attention has been paid to the national and transnational power exercised by finance in global corporate ownership networks, this article provides a systematic investigation of the extent to which financial firms own capital nationally and globally.
This article makes several empirical contributions to the emerging literature on asset manager capitalism. First, examining Form SEC filings that have data on US institutional investors and US mutual funds (provided by the Thomson/Refinitiv database), I estimate that the share of US stocks owned by US institutional investors has increased from 48% to 59% between 1997 and 2020. This includes all ownership gains attributable to the growth in equity holdings of US index funds, whose respective equity ownership increased from 2% to 15%.
During this period, the Big Three exhibited remarkable growth, increasing the share of US-listed companies in which they held investments from 56% to 81%, the share of US-listed companies in which they were the largest shareholder (among US institutional investors) US) from 4% to 40% and its overall share of the US stock market from 5% to 17%.
In addition to being permanent universal owners, I find that the Big Three do not hold proportionate investments across sectors, with their equity holdings ranging from 14% in the information sector to 25% in the real estate sector. Now, this highlights how the rise of the Big Three has been sectorally uneven in the United States.
Asset managers
Expanding on the historical analysis of shareholders of US listed companies, this article examines the presence of asset management capitalism in other countries. Drawing on an extensive global corporate ownership dataset provided by Orbis, with 262.331 unique shareholders from 39.029 listed companies located in 139 countries, I develop estimates for the equity shares of different shareholder groups in nine regions of the world and in 16 sectors.
I found that in 2018, 55% of global wealth was owned by various financial intermediaries (including 27% by mutual and pension funds), followed by 16% owned by non-financial companies, 6% by the government, and another 6% by individuals and foundations, with the remaining 16% of assets having no identifiable shareholder.
Although asset management capitalism is not limited to the United States, its geographic presence is highly varied. In some countries (e.g. Australia), it is driven by the investment holdings of domestic mutual and pension funds, while in others (such as the UK) the largest shareholders are US asset managers. Largely because of the presence of the Big Three in countries outside the US markets, the equity holdings of US investment funds spread far beyond the borders of the United States, allowing them to occupy the core of the global corporate network.
The Big Three's unrivaled influence is demonstrated by the fact that they appear as shareholders in 20% of listed non-US companies, account for 9% of cross-border investments and own 4% of non-US shares. As the three largest shareholders in the world, the Big Three are also among the top 10 shareholders in Europe and East Asia.
Investments from the Big Three, however, are largely absent in several regions of the world, including post-Soviet states, the Middle East, Africa, and South and Southeast Asia. It is necessary to highlight the importance of stock market indices and index providers in determining where asset managers' capital is allocated.
Conceptually, this article aims to present three broad arguments. First, given that more than half of all listed companies globally are now directly owned by financial firms, this article proposes that finance plays a new role in the global economy as business owners, granting financial actors direct forms of influence on the economic activities of these companies.
Second, as the rise in financial ownership over the past two decades has been driven by the proliferation of index funds, it is argued that the Big Three have come to occupy a structurally prominent position in the global network of corporate ownership. Given that they are the three largest shareholders in the world, their activities can serve as an indicator of future developments in the global investment landscape.
Third, although the Big Three's predominantly passive investment strategy makes them universal owners, this article shows that the Big Three hold disproportionately sized investments not only across economic sectors but also across regions of the world. This unequal distribution of investments suggests that the dispersion of passive investment has led to certain sectors and regions becoming privileged investment locations through their inclusion in stock market indices.
While research highlights the way in which asset managers are geographically selective as active investors, this article emphasizes that the rise of passive investing has produced a distinctly new and geographically uneven landscape of global capital flows.
*Albina Gibadullina is a professor in the Department of Geography at British Columbia University.
Translation: Eleutério FS Prado.
Article introduction Who owns and controls global capital? Uneven geographies of asset manager capitalism, published in the magazine Economy and Space, Vol. 56(2) 558–585, 2024.
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