19 Jan It’s not Business, Sonny. It’s Strictly Personal.
We didn’t phrase it this way yesterday, but Larry Fink’s complaint at Davos boils down to this: He wanted to be famous, and now that he is, he’s upset that he is not famous in the right way, for the right things. He wanted people to recognize him as the savior of humanity, the guy who finally found the elusive Third Way that blends the mechanisms and financial results of markets with the social responsibility and uniformity of collectivism. Larry Fink is unhappy because he is, quite possibly, the most famous asset management figure in the world, yet the stupid plebeians still refuse to acknowledge his greatness.
Now, as we have noted before in these pages, Fink and BlackRock are not the only asset management entities frustrated by the direction that Fink’s fame has taken. In a piece we wrote last month, for example, we suggested that Vanguard, the second-largest asset management firm in the world, has likely also found the sustainability/ESG-driven notoriety discomfiting, although for much different reasons than Fink. Vanguard had just announced that it was leaving the Net Zero Asset Managers initiative (NZAM) and the Glasgow Financial Alliance for Net Zero (GFANZ). This, we argued, was a second indication that the firm was growing increasingly uncomfortable:
Vanguard’s decision to “exclude controversial industries” from its new ESG funds was likely an early indication that the company was growing uncomfortable with its newfound “fame” as an “activist” investor. Since its founding, Vanguard’s reputation has always been the exact opposite. It was the solid, staid, passive giant that quietly and competently generated excellent returns. And while the terms “passive” and “activist” apply to different aspects of the investment process, the fact Vanguard was becoming associated with the latter term more so than the former undoubtedly made executives uncomfortable (as well as causing Jack Bogle to roll over in his grave)….
Fame is a double-edged sword, after all. And [Vanguard CEO Tim] Buckley et al. might just have figured out what Larry Fink wasn’t prescient enough to understand: sometimes it’s better to be the biggest and the best than the most famous.
Late last week, Reuters published an analysis that helps explain why Vanguard is the one of the Big Three that has bristled the most noticeably at its newfound fame and reputation as a firm dedicated to “doing well by doing good.” It is an explanation that, in retrospect, seems obvious but which also raises some interesting and concerning questions:
Vanguard Group’s decision last month to quit a key climate change coalition underscores how the retail investors who dominate its client base focus less on environmental, social and corporate governance (ESG) priorities than institutional investors.
Vanguard said last month it would drop out of the Net Zero Asset Managers (NZAM) initiative, whose members commit to making their investment portfolios emission-neutral by 2050. It said 80% of its close to $8 trillion in assets are in its index funds, which primarily attract retail investors….
Vanguard’s biggest competitors, BlackRock Inc (BLK.N) and State Street Corp’s (STT.N) asset-management arm, rely more on institutional investors including pension funds and foundations. Both BlackRock and State Street have stuck with NZAM.
At BlackRock and State Street, mutual funds and exchange-traded funds – the investment vehicles popular with retail investors that include many types of index funds – account for around 41% and 30% of assets, respectively, according to data from Morningstar Direct and company disclosures. At Vanguard, that figure is 88%….
The point here is obvious (and we assume Reuters has more to back this up than simply the Vanguard numbers): retail investors aren’t as concerned about ESG and sustainability as institutional investors are. The question, of course, is “why?”
There are, we’re sure, several possible or partial answers to this question. Clearly, the copyeditors/headline writers at Reuters think it’s because retail investors are backward rubes (emphasis added): “Vanguard’s climate group exit shows retail investors trail on ESG.” Ah, yes. Get with the program, retail investors!
We don’t know that we can offer a definitive answer here, but we think we can come closer than Reuters did. We think it’s possibly the case that retail investors are less interested in ESG than institutional investors because retail investors are more selfish.
That’s right. You heard us. They’re more selfish.
Just bear with us a moment while we explain.
Obviously, you don’t need us to explain to you the differences between retail and institutional investors, but, for the record, the biggest difference is that those who constitute the former group invest on their own behalf, while those in the latter invest on someone else’s behalf. We know that institutional investors, as a rule, have fiduciary obligations that require treat the funds they invest as prudently as if they were their own, but, in the end, they’re NOT. They just aren’t. Your money is your money. Institutional investors’ money is their clients’ money.
We in the anti-ESG community spend a great deal of time talking about how ESG violates asset managers’ fiduciary duties. And the people in the ESG community spend a great deal of time saying “nuh-uh.” The difference is that we’re basing our assessment on real, hard, tangible factors, while they’re basing theirs on hypothetical conditions and situations that are driven (whether they’ll admit it or not) by political calculations. We see fiduciary obligations purely in concrete pecuniary terms, while they see them in ethereal, theoretically pecuniary terms mitigated and influenced by politics and policy.
The same distinction applies, to a certain extent, to retail and large institutional investors. Retail investors think about the bottom line. Today. Tomorrow. When they turn 65. To them, their investments translate into college education for the kids, vacations, a comfortable retirement, not having to eat cat food when they’re 80, etc. Institutional investors don’t have the same personal and emotional connection to their investments. They’re Tom Hagan or Michael Corleone to retail investors’ Santino. It’s strictly business.
Obviously, there are situations in which “strictly business” is the far better, far more rational approach to investing. That’s why we have institutional investors. That’s why the overwhelming majority of the business today is institutional, with something like 90% of all trades being institutional trades, up from about 30% just a few decades ago. Again, you don’t need us to tell you about this.
At the same time, however, some situations are simply better handled by people closer to the heart of the matter. There are some situations in which global, multinational, trillion-dollar management companies are too far removed from the bottom line to see it clearly. That’s the primary reason that we think that true diversity – among institutional investors, passive fund managers, active managers, investment platforms, investment strategies, etc. – is one of the keys to ending the dictatorship of woke capital (to coin a phrase).
The inimitable Russell Kirk wrote that “a nation is no stronger than the numerous little communities of which it is composed. A central administration, or a corps of select managers and civil servants, however well intentioned and well trained, cannot confer justice and prosperity and tranquility upon a mass of men and women deprived of their old responsibilities.”
The same basic idea should apply to investing. Even if Larry Fink were well-intentioned – which he is not – the idea that he could manage everyone’s investments equally from a faceless, uniform, centralized hub is absurd.
Vanguard appears to have recognized this. Good for them…and good for all of us.