Index funds unlikely to engage in anti-competitive behaviour

Despite dominating holdings on for Australian Securities Exchange (ASX)-listed companies, index-tracking funds are unlikely to engage in anti-competitive behaviour, according to research from an academic for the common ownership inquiry. 

Research from Jenifer Varzaly, Durham University Law School Assistant Professor of commercial and corporate law, found that 17 of the ASX 20 companies had only institutional shareholders within their group of 20 largest shareholders, and the other three only had one non-institutional shareholder. 

“Looking at the largest shareholders – the groups of the 20th largest shareholders within the ASX 50 – my research uncovered that non-institutional ownership is in totality 0.75% within the ASX 20 and 2.2% across the ASX 50,” Varzaly said. 

“What that tells us is 97.8% of the ASX 50 groups of 20 largest shareholders are institutions – this is striking in its magnitude.” 

However, Varzaly said concentration was not necessarily equated with control of the company and just having largely concentrated shareholders doesn’t tell much. 

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Her research also found the “big three” index funds of BlackRock, Vanguard and State Street accounted for one-third of the substantial shareholding positions across the ASX 50.  

“Notably, 87.1% of these holdings are in companies within the financial sector – what that tells us is we do see common ownership in Australia,” Varzaly said. 

“There’s conflicting empirical research in terms of common ownership and its anti-competitive effects in general. 

“But from an index fund perspective the research predominately shows if you look at their business model, if you look at what they are incentivised to do, it’s not to engage in corporate governance on a company-by-company perspective and the research indicated they took more of a passive approach.” 

In its submission to the enquiry, Vangaurd said: “Our engagements with companies are not related to strategy, pricing policies or day-to-day operations. 

“Our company engagements are predicated on a fiduciary stance, not an ideological or control-seeking one. 

“We believe that further regulation the common ownership of companies within the same industry, based on an unproven hypothesis, could be detrimental to investors and markets alike.” 

BlackRock said: “Index funds have democratised access to diversified investment for millions of savers planning for long-term goals like retirement. 

“Asset managers remain predominantly minority shareholders in public companies. While we provide important representation for shareholders, each is but one voice among many. It is ultimately the responsibility of the board and management to consider the interests of all stakeholders – including long-term shareholders.” 

Super funds are still a different matter 

While superannuation funds were viewed as having a more “activist” approach, Varzaly said there had not been as much research of the extent of their activism. 

“The research shows from a positive perspective, that some super and pension funds are able to bring balance and represent their beneficiaries in perhaps a better manor,” Varzaly said. 

Varzaly also suggested as one solution would be to reduce the threshold for substantial shareholder disclosure rules. 

“The UK does it at 3% ownership and the research in the UK has shown that activists will hover right under 3% to shadow themselves.  

“In Australia we have 5%, the US has 5%... If we were to lower that threshold that would provide more information.”