The Bloomberg columnist Barry Ritholtz wrote an error-strewn response to some comments I made on the common ownership debate at a recent conference that was sponsored by Morningstar. I wrote the following letter to Bloomberg, which you can read if you own a Bloomberg terminal or hit the comments button after Ritholtz’s column. For everyone else, here is the letter:
Ritholtz does a disservice to readers by misrepresenting the important debate over common corporate share ownership. The debate began when a group of economists showed that airline-ticket prices have increased with the degree of common ownership of airlines — which means the extent to which institutional investors like BlackRock, Vanguard and State Street own (or have an effective ownership interest in) competing airlines. Economic theory tells us that when competing companies are owned or partly owned by common dominant shareholders, competition between the companies should decline, which is what the airlines study (along with another study on banking) suggests is happening.
Ritholtz makes several misleading assertions:
No. 1. He says that this theory is contradicted by the fact that investors have saved money by buying shares of the index funds offered by the Big Three. However, the critics like me do not deny that investors benefit by buying passive index funds. The critics argue that common ownership hurts consumers (or more broadly, people who lack significant stock holdings, which is to say most Americans). The problem is airline-ticket prices, not airline-stock prices, which of course should benefit from anticompetitive behavior.
No. 2. Ritholtz next says that the studies of airlines and banking that I cite do not take into account consolidation in the underlying industries. In fact, they do. Increasing common ownership aggravates the anticompetitive effects that arise from independently occurring consolidation at the industry level.
No. 3. Ritholtz says that I and the other critics ignore industries where prices have gone down. The problem with this argument is that you can’t simply look at prices. Prices reflect both costs and market structure; so even if concentration increases, prices may decline as technology advances. Although he is right that most industries have not been studied, no one has said otherwise.
No. 4. Ritholtz says that the criticisms of common ownership assume that the institutional investors “engage[d] in a criminal conspiracy to restrain trade and fix prices. Yet no one even tries to make this assertion.” For a good reason: he’s wrong that the critique assumes a criminal conspiracy. The theory is not that institutional investors agree with each other to fix prices. The theory is that the each institutional investor independently declines to pressure the firms it owns to compete with one another.
No. 5. Ritholtz says that in my view, “Vanguard, Blackrock, and State Street are going to throw out their investment philosophy, ignore their fiduciary obligations to their investors and risk vast reputational harm.” No, I assume only that the three institutional investors seek to maximize returns for their investors.
No. 6. Ritholtz suggests that the studies can’t be right because common ownership has existed for decades, all the way back to the 1960s. But there is no doubt that common ownership has increased dramatically over the last several decades. Common ownership will influence competition only when the common owners are the dominant shareholders of the competing firms, which was not the case in the past.
No. 7. Ritholtz suggests that my criticisms are focused on index funds, and that I’m on the side of active investors. That’s like saying that someone who opposes consolidation of the airline industry is opposed to air transportation and thinks everyone should walk. My worry is about the size of the institutional investors, which are now the largest owners of competing firms in numerous industries, not the products they offer.