Industry Updates

ETF Wrap: Passive ownership enters the political main stage

A political heavyweight's critique of passives, the ECB rates hike and new tools for settlement in Europe made headlines this week

Jamie Gordon

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Democrat heavyweight Bernie Sanders took to Twitter this month to voice concerns about the growing influence of asset managers, a sign the passive ownership discussion could be closer to entering the gaze of policymakers.

In a tweet on Tuesday, Sanders said: “Today, in America, just three Wall Street firms – BlackRock, Vanguard and State Street Global Advisors (SSGA) – manage $22trn assets. These three firms are major shareholders in more than 96 percent of S&P 500 companies. Obscene.”

His comments join a chorus expressing doubts about the growth of passives, with Berkshire Hathaway vice chairman Charlie Munger saying the ‘Big Three’ are creating a new centre of power for corporate governance, while Tesla CEO Elon Musk said in May that “passives have gone too far”.

Passives currently own an average of 21.2% of every company in the S&P 500, a figure that has doubled in just seven years according to Bloomberg Intelligence.

As Munger suggested, this rate growth signals a new and likely expanding centre of ownership, with just three firms’ products wielding significant power over shareholder voting processes on behalf of their clients.

Index investing is also an imperfect art. S&P 500 reshuffle announcements already have significant influence on company valuations, with this likely to increase as passive ownership continues to expand.

There are also fears passive ownership could create market inefficiency, with index trackers forced to buy constituents regardless of their financial or corporate soundness.

Sanders’ comments bring these issues to the attention of the general public but also within the political sphere. If these discussions gain traction in the political arena over time, it bears thinking about how long it will be until the possibility of restrictions on passive ownership are discussed – and what implications this could have for open-ended structures.

However, while it is worth paying attention to new centres of financial power, passives are currently taking market share from the less-transparent, higher-fee ‘old guard’ of the investing world, who have problems of their own.

There are also other discussions capturing the public eye in the context of US politics and investing such as concerns politicians are trading based on privileged information.

Perhaps it will be a while before passives face any existential risk from political bodies but Sanders’ scathing review could just be the first of many.

Asset managers ponder ‘desperate’ ECB hike

On Thursday, the European Central Bank raised interest rates for the first time in 11 years – and by a considerable 50 basis points (bps), higher than the 25bps hike initially priced in.

Konstantin Veit, portfolio manager at PIMCO, said the move happened “somewhat unexpectedly” and noted the policymaker is moving away from a forward guidance to more of a meeting-by-meeting approach on future rates hikes.

Meanwhile, Morgane Delledonne, head of investment strategy for Europe at Global X, said the move was “widely unexpected” given turmoil in Italy and drop in business sentiment across the region.

“This very hawkish move almost looks like a desperate last opportunity to raise interest rates before the region falls into a recession in the fall,” she added.

“This is a very challenging time for the ECB which obviously does whatever it takes to combat inflation and anchor in inflation expectations even at the risk of precipitating a recession.”

New tools for trading efficiency

Following the introduction of the Central Securities Depositories Regime (CSDR) and its penalties for late settlements in February, Clearstream has launched two data-based tools for predicting future settlement failures and increasing settlement efficiency.

The settlement dashboard and prediction tool will offer insights into past, present and future settlements, as well as allowing participants to analyse markets, asset classes and counterparties, to try and increase efficiency and liquidity.

The settlement prediction tool will use artificial intelligence to predict future settlements in an effort to avoid potential settlement failures.

ETF Wrap is a weekly digest of the top stories on ETF Stream

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