Giant Asset Managers, the Big Three, and Index Investing

Abstract

A robust literature describes the incentives and stewardship practices of the “Big Three” asset managers (BlackRock, Vanguard, and State Street Global Advisors), often referring to these asset managers as “passive.” This is so common that the “Big Three,” “index fund,” and “passive manager” are used almost interchangeably by both academics and practitioners. This shorthand emerged in the foundational scholarship in this area, and while they may remain useful in certain contexts, their casual use obscures important features of the market and contributes to misperceptions. In this chapter, we demonstrate that it is a mistake to equate passive investing with index funds; index funds with the Big Three; and the Big Three with giant asset managers.


Although they are major providers of index funds, the Big Three asset managers also control trillions of dollars in actively managed funds and differ substantially from one another in important ways. The Big Three are also not the only giants on the Street; to take just one example, Fidelity’s growth over the last few years makes it hard to justify overlooking its role in corporate governance. Finally, the conflation of index fund with either the Big Three or “passive” obscures the fact that many index funds are sold by non-Big Three asset managers, as well as the enormous heterogeneity across index funds. All of this affects incentives to monitor and engage in stewardship. We sketch some of the consequences of these distinctions and set forth questions for further research.

Keywords: Big Three, passive investing, index funds, corporte governance