Mega-sized fund managers could be making markets more risky than is commonly assumed, a new award-winning study has found.
The research paper – authored by academics Massimo Massa, David Schumacher, Yan Wang – found that BlackRock’s US$13.5 billion purchase of Barclays Global Investors (BGI) in 2009 led to “lower stock prices, liquidity, and volatility” of shares with newly-concentrated ownership under the combined entity.
According to the study, other institutional investors – particularly those that “assign a high importance to liquidity” – cut exposure to stocks featuring BlackRock/BGI as significant holders.
The study, titled ‘Who’s afraid of BlackRock’, found statistically significant and ongoing effects on certain shares both before and after the merger – still the biggest funds management tie-up in history – after analysing vast amounts of fund and stock data.
Notably, the analysis found shares with high concentration of BlackRock/BGI dropped by between 65 and 97 basis points each month over the three months leading up to formal regulatory approval of the deal in 2009.
“This corresponds to a cumulative abnormal negative return of up to 3% over a three-month period that does not fully revert in the months following the completion of the merger,” the paper says.
Somewhat counter-intuitively, both volatility and liquidity of the BlackRock/BGI-dominated stocks fell before and after the merger, the study found.
“[the results] suggest that concentrated ownership need not exacerbate stock volatility but may in fact cause the opposite at the cost of lower liquidity,” the paper says.
The study found concerns about ‘informed trading’ advantages accruing to dominant stock-holders or information-loss due to mass ‘internal liquidity provision’ (off-market trading matches between BlackRock/BGI funds) could not explain the results.
Instead, the paper argues “that investors are careful to hold stocks with concentrated ownership as these expose them to idiosyncratic shocks of the large owner”.
“Such positions expose investors to the risk of future fragility,” the paper says.
The research found a similar – but smaller – effect after applying the statistical techniques to about 80 fund management buyouts between 2002-12 (excluding the 2008-10 period covering the BlackRock/BGI merger). On average the acquiring firm had about US$21.6 under management compared to $2.7 billion for the takeover target firm.
Post the 2009 deal, BlackRock assets under management hit US$2.7 trillion including the former BGI exchange-traded fund (ETF) range, iShares. As at April this year BlackRock – the world’s largest fund business – managed over US$6.3 trillion.
The research paper, which won a CFA Institute-sponsored award this year, was partly-inspired by a December 2013 article in ‘The Economist’ arguing BlackRock’s size did not represent a systemic threat to markets – an issue then under review by regulators.
“In this paper we subject the Economist’s logic to an empirical test,” the report says.
Overall, the research results “suggest that large asset managers may contribute to systemic risk and that other market participants are aware of it and condition their actions accordingly”.