The inquiry reported retail investors only own about 11 per cent of the market, and that share has been declining because of a couple of long-term changes in how households invest.

Loading

First, the popularity of investing through index funds has surged, making them among the biggest shareholders in the local market.

To be clear: these funds provide a useful service, by allowing people to avoid paying higher fees to a professional fund manager trying to beat the market (which is notoriously tough.) But at the same time, the inquiry showed how their popularity has given them huge clout. BlackRock, Vanguard and State Street were estimated to own about 14 per cent of the entire ASX 200 between them in 2019.

The second big shift is that workers have been required to put a growing share of their pay into superannuation funds, which then invest a large chunk of that cash into the sharemarket. The drive to improve returns is causing more funds to seek greater “economies of scale” by merging with a rival.

Aside from examining “capital concentration,” the inquiry also looked at the related issue of “common ownership” - where investors own shares in competing listed firms. Some research overseas has suggested these situations could dampen competition, harming outcomes for consumers.

So what is the concern, exactly?

In theory, it’s that investors who own minority stakes in competing firms may tolerate less competition between these businesses because that would allow these firms to make bigger profits.

A 2021 paper in the Economic Record, published by Leigh and Adam Triggs of the Australian National University, put it this way: “Since the incentive of shareholders is to maximise the total value of their portfolio, investors who own rival firms may prefer a degree of competition between the firms that is less than the social optimum.”

Importantly, the authors said there would not have to be anything illegal happening for this to occur. All up, they found that 49 of 443 Australian industries showed common ownership, and they confirmed some big rivals on the ASX have some common major shareholders. Vanguard and BlackRock each held stakes of about 5 per cent in all Big Four banks, for example.

That in itself doesn’t prove anything sinister - the question is whether we’d be more concerned if those stakes keep rising, which seems quite likely given the growth in index funds.

Importantly, the academic debate over “common ownership” is a long way from settled.

Index funds largely dismissed the theory in their submissions to the inquiry, saying there was no conclusive evidence that common ownership led to anticompetitive behaviour. Superannuation giants also played down the issue.

IFM Investors, for example, pointed out that company directors had a duty to act in the interests of the corporation, not individual shareholders, and added that it had not seen any evidence common ownership was “generating harm to consumers or the broader economy”.

But the competition watchdog - whose brief is to serve the wider community - seems more keen on the topic. Former Australian Competition and Consumer Commission chairman Rod Sims strongly welcomed the inquiry when he gave evidence in September, saying it was a new issue, but he was “very interested” in the topic.

“It’s time that this issue had some focus,” Sims said.

Despite the money managers’ attempts to pour cold water on the “common ownership” theory, the inquiry’s final report seemed to agree with Sims.

It concluded the evidence was contested, but said regulators needed to understand the risks in this area, so they could respond if needed. A bipartisan recommendation was that the ACCC should be required to actively monitor the extent of common ownership, and that it be able to consider the issue when assessing mergers.

There are perfectly logical reasons why “mega funds” are becoming a bigger part of the investment landscape - but it is also worth monitoring how these investment giants could affect competition.