Equities ownership concentration has rapidly increased in recent years, according to new research from MSCI.
The research finds that 46 percent of companies on the MSCI ACWI Index (the firm’s flagship global equity index) now have one or more shareholders or shareholder blocks holding 30 percent or more of the issuer’s voting shares. By comparison, in 2015 less than a third of companies (32 percent) had such an ownership concentration.
MSCI considers a company with one or more shareholders or shareholder blocks holding 30 percent or more of the company’s voting shares to be a ‘controlled company.’ Even among companies without a controlling shareholder, concentration has increased over the last five years – particularly among US-listed companies and certain sectors, the firm says.
In contrast, MSCI says widely held companies dropped from representing more than half (52 percent) to 40 percent of the index market cap, while the percentage of companies that were widely held dropped from 41 percent to just 23 percent – something MSCI describes as ‘another clear indicator of increased ownership concentration.’
Among widely held and principal-shareholder companies globally, BlackRock and Vanguard are the biggest holders. BlackRock held 5 percent or more of 638 index constituents (458 of which were US listed), with an average holding size of 7.5 percent. Vanguard held 5 percent or more of 424 index constituents (395 of which were US listed), with an average holding size of 9.4 percent.
Researchers note that some of the changes can be attributed to the ‘more than 400 new China-listed constituents of the index, many of which are founder or state controlled,’ but point out that the market cap share of US listed companies also increased by 5 percent since 2015, ‘confirming a more widespread increase in ownership concentration.’
MSCI warns that the shift could have consequences for engagement. ‘For investors, this growing concentration of ownership and control of global equities could result in a loss of influence, and make engagement with listed companies more difficult, which may also have important ramifications for how companies are governed,’ the report authors write in Ownership and control 2022: Global equities concentration on the rise.
THE RULE RATHER THAN THE EXCEPTION
Although researchers note that in previous years, companies tended to follow a trend from being founder-owned through family and principal shareholder ownership toward being widely held, a ‘different pattern’ has emerged in recent years.
‘The dominant trend in ownership has been toward more concentrated ownership, especially toward more controlled companies,’ the authors write. ‘Among the largest companies we examined, which have also grown much larger than they were in 2015, concentrated ownership has become the rule rather than the exception, shifting the focus of corporate governance increasingly toward principal risks from agency risks.’
Looking at some of the factors that have contributed to this shift, the researchers write: ‘Steady market growth over the past few years has played a role, with essentially all of the large institutional investors we examined having reported a considerable increase in assets under management. For investment managers whose allocations lean more toward index funds, a gradual increase in concentration may be inevitable in such a market, but we can see that the rules for fund management do vary considerably.
‘For example, while BlackRock holds many more 5 percent-plus positions than Vanguard, Vanguard holds nearly four times as many 10 percent-plus positions. We also noted a possible relationship between the widely held and principal-shareholder companies exhibiting the greatest degree of concentration and the highest combined cash dividend and share buyback payouts, over the same historical periods, suggesting that fund-level policies regarding dividend and buyback reinvestments may also have played a role.’