The misappropriation of the economic freedom of millions of home investors by CEO Larry Fink of BlackRock Inc. has unintended consequences.
“We have a new class of emperors, and they are the people who have voting shares in investment funds,” Charlie Munger, partner from philanthropist Warren Buffett, and great supporter of index funds.
“I think the world belongs to Larry Fink, but I’m not sure I want him to be my emperor” , Munger said.
Fink runs BlackRock, a large investment management company that sells index fund shares to investors. BlackRock currently has several trillion dollars of corporate equity in these funds.
Fink is powerful. He has perhaps benefited more than anyone else from the prevalence of investment in index funds. He’s also a big advocate of what’s called “investing in Environmental and Social Governance,” or ESG.
Here’s how it works: Millions of investors buy a index fund because they basically want to own a stock index. Instead of owning a company or a few companies, when they buy the iShares S&P index fund 31, for example, investors own a fraction of each share of the first 500 indexed by Standard & Poors, in the same percentage of the share index at the time of purchase.
Index funds are worth the return of the index they represent; therefore, the return on an investment index fund is equal to the return on the stock index itself, for as long as the investor owns it, before subtracting the BlackRock management fees.
BlackRock, in turn, buys shares in each index company in proportion to the money customers spend on index funds. Then the investment management giant sells them when its clients sell the index funds, to pay the client.
In the long run, the stock market grows, so the Index funds are a safer investment than speculating in stocks, because individual stocks often underperform indices, and because individual companies can go bankrupt, wiping out investments.
When millions of people buy trillions of dollars from BlackRock’s index funds, the company ends up with the equivalent of every share in the stock index in their accounts. This is called passive investing, as opposed to active investing, because no one is choosing certain stocks as investments from which they will derive the gain; instead, investors are simply buying or selling each stock within an index.
In 45 of December 2021, BlackRock held a sum equivalent to more than 31 % of US GDP in passive investments in company accounts because of index fund owners.
There is nothing wrong with index funds. Investments in index funds simulate stock market summation returns because, when purchasing an index fund, the client owns a tiny fraction of each company in a stock index, such as the S&P 500, or the MSCI World Index of global stocks.
However, there is a problem with Fink. By holding the equity stakes in BlackRock’s index funds, Fink votes at shareholder meetings as if he were the multi-trillion dollar investor in stocks – which he is not.
On 31 December, according to BlackRock’s annual report, Fink, through his company’s index funds, was voting the share of 6,45 trillions of dollars in shares.
TV and business press bigwigs, along with finance professors at colleges and universities, have long preached the merits of investing in index funds, based on a theory called the “efficient market hypothesis” . The theory says that the value of a stock at any given time is very roughly reflected by its price on the stock market, making it unfeasible for someone to continually beat the stock market index by picking individual stocks.
The efficient market hypothesis is true for the average investor. The success of Wall Street titans such as Buffet and Carl Icahn disproves it as a one-size-fits-all option, as does the success of countless anonymous investors who have made great fortunes but are not included in research findings on mutual fund returns. But that’s not the subject here.
New York Post columnist Charlie Gasparino recently explained what Fink’s defense of ESG represents, writing that the CEO of BlackRock “is known for pushing something called ‘stakeholder capitalism ‘ (which I criticized) – a vague concept in which corporations seek to improve the human race rather than seek profit for shareholders (shareholders ). And for its adherence to some sealing policies (woke) through an investment fad known as ESG (Environmental and Social Governance) standards. ”
In the 2020 annual report, BlackRock says: “We invest our customers’ money in all types and sizes, in every corner of the world. These investments provide capital for businesses to grow and create jobs, which in turn enable economies and societies to thrive. We use our voice as shareholders to urge companies to focus on important issues that will also impact the value of their investments, such as climate change, fair treatment of workers and equality. We are also working, through the BlackRock Foundation, to expand financial security for low-income groups that face barriers to economic participation and may be vulnerable from climate change disruption.”
This focus on climate change is why BlackRock, as the second largest shareholder in ExxonMobil, voted together with a group of shareholders that had only 0,02% of Exxon. In that vote, he advocated replacing old board members with members who believe that “the lack of any serious effort on the part of ExxonMobil towards diversification, as well as aggressive spending based on heavy demand for oil and gas for decades to come, run the risk of destroying a long-term value, which is the intention to reduce all emissions .”
It is even up to Fink, commanding the votes of millions of shares bought by other investors, to decide whether a big oil company should reduce its investments in oil and gas, from which people depend to survive?
What a bully tactic, used by a bully who is voting for his own agenda with billions of dollars of voting rights bought by other people, who bought the Fink’s index funds. They bought it to receive a return on their investment portfolio equal to the total stock market, not so that Fink could impersonate them at shareholder meetings of potentially every company in the world, and vote with their shares.
Such interference by Fink and other directors of index fund companies, based on their presumption that they know what is good for the planet, can have unforeseen consequences. drastic intentions.
Right now, the average cost of gasoline is spiraling upward. scent. And big oil and gas companies haven’t invested in new exploration in recent years, in part because of Fink and other ESG advocates. Now the Biden administration has been standing over their shoulders and stigmatizing the fuel we all need to drive our cars and heat our homes.
These actors have created a lot of uncertainty about the future of energy exploration and oil well drilling. As for Biden, he put huge restrictions on drilling oil and gas wells on his first day in office, and he also canceled the Keystone XL pipeline.
BlackRock’s claim in its annual report that “low-income groups […] may be vulnerable to climate change disruption” is not worth the paper expended to print it. High gas prices hurt the poor the most, and in these cold climates they sometimes freeze to death if they cannot live in warm houses, as happened recently in Ukraine.
There is nothing wrong with index funds. But Larry Fink is not millions of people who have index funds. Their interests vary widely and are not aligned with each other; much less his interests.
Fink and the CEOs of other companies that sell index funds shouldn’t vote trillions of dollars worth of index fund shares at every meeting. shareholders in the world. They should save the planet some other way.