The growth and concentration of the investment management industry has captivated the scholarly community. Recent scholarship has focused on the “Big Three” investment managers — Vanguard, BlackRock, and State Street Global Advisors — and charted their rapid accumulation of assets with alarm, predicting that these institutions will soon control the U.S. equity market. And yet, few scholars have examined how exactly the Big Three, and institutional investment managers more broadly, exhibit growth in equity ownership. The conventional narrative is that institutional ownership increases when investors move dollars from one investment fund to another. We show that these “reallocational flows” are only part of the story. Indeed, decisions made by investors, institutions, and the corporations that they invest in can accelerate the growth of certain institutions relative to others.

Institutions may exhibit differential growth in ownership due to the difference in return on the assets under management relative to the market return. Less obviously, corporate decisions to either distribute or raise equity capital, which we term “balance sheet effects,” provide another mechanism that drives differential growth in institutional ownership. Consider, for example, corporate repurchases. When a firm repurchases its own shares via a stock buyback, only some investors sell their shares. The investors that do not are left holding a larger portion of the firm, whose market value has declined due to the buyback. It follows that institutional investment managers that tend not to sell during buybacks (such as those that specialize in passive funds) and do not experience contemporaneous outflows will see their ownership stake increase when there are aggregate net buybacks in the market. Other corporate distributions that have a similar effect on ownership are cash financed acquisitions and going private transactions. Likewise, aggregate equity issuances via initial and seasoned equity offerings can affect ownership, depending on the degree to which institutions participate in such offerings and the magnitude of contemporaneous inflows they receive. The overall impact of corporate aggregate distributions depends on the magnitude of such distributions and their covariation with institutional-level flows.

This last point reveals an important insight — when evaluating the growth of an investment manager’s ownership of the market, one cannot consider its inflows in isolation, i.e., without accounting for aggregate market flows. For example, an institution with zero dollars of inflows in a certain year may still feature growing ownership of the market if the market has shrunk due to net corporate distributions. Indeed, in years where the aggregate market flows were negative due to net stock buybacks, zero or slightly positive inflows can lead to an increase in investment manager ownership.

Our article formalizes these insights, showing how fund fees, capital gains returns, dividend and capital gains distributions, and balance sheet effects shape institutional growth. Our framework generates novel insights about institutional growth, and why certain institutions (and those that specialize in passively managed mutual funds in particular) might have grown faster than others.

We also use our framework to establish the most complete picture of institutional and market flows since 2000, combining data from several sources.  We hand collect data on institutional ownership, distributions, fees, and reinvestment of dividends and capital gains directly from SEC filings. The picture that emerges is likewise counter to conventional wisdom. Specifically, we reveal slower growth of the Big Three’s ownership of the market than the conventional narrative suggests, with substantial differences between each institution. In particular, BlackRock’s scaled flows are only slightly positive on average following its acquisition of BGI in 2009, while State Street exhibits scaled flows that are slightly negative over the past decade. Vanguard’s scaled flows remain positive, although we find a steady decline approaching zero in recent years. Fidelity — which is excluded from the Big Three, despite its large size and share of inflows into passive funds — likewise exhibits more outflows than inflows. By contrast, smaller asset managers like Geode, JP Morgan, and T. Rowe have exhibited increasing ownership over the past few years. These results suggest that the market is more robust than the conventional narrative would suggest, and that the Big Three are not quite “eating the world.”

More important, our analysis points to multiple factors — the size of fees, corporate payout policy, dividend reinvestment, corporate financing decisions, and asset manager M&A — that will shape the future growth of the Big Three and other large investment managers. For example, in order for the Big Three to achieve the alarming ownership levels that some scholars have predicted, their flows will need to be consistently higher than market flows — a feat that becomes exceedingly more difficult as an institution grows to encompass a larger share of the market. More broadly, as this discussion reveals, debates about the Big Three interact with many other policy conversations, and those who are concerned about the rise of giant investment managers should be aware of the myriad factors that contribute to their growth.

This post comes to us from Alon Brav at Duke University’s Fuqua School of Business, Dorothy S. Lund at Columbia Law School, and Lin Zhao at Duke University’s Fuqua School of Business. It is based on their recent article, “Flows, Financing Decisions, and Institutional Ownership of the U.S. Equity Market,” available here.