How BlackRock Could Scare Investors Into Selling

Academics have found investors—in fear of fire sales—migrate from stocks owned by asset managing giants, resulting in negative returns and low liquidity.

Asset managing giants like BlackRock could not only have potentially risky and lasting ripple effects in the marketplace but also in other investors’ behaviors, according to research.

These behemoths’ systemic threat extends beyond its sheer size, wrote Massimo Massa of INSEAD, David Schumacher of McGill University, and Yan Wang of Erasmus University Rotterdam. In fact, investors tended to fear the concentration of stock ownership more than their assets under management.

The paper studied market and investor behavior around BlackRock’s acquisition of Barclays Global Investors (BGI) in June 2009 and found asset owners were running away from BlackRock-owned stocks, some even before the merger was completed.

The acquisition brought BlackRock’s total assets to $2.7 trillion in 2009. The stocks affected by the combined forces also accounted for 60% of the global market capitalization, the paper said.

“If everyone is scared the elephant is going to sell, then they move quickly to sell first.”BlackRock currently has $4.72 trillion, according to its website.

Massa, Schumacher, and Wang found institutional investors, swayed by perceived risk, rebalanced away stocks where BlackRock’s holdings increased post-merger, moving towards comparable stocks that were not held by either firm.

Some investors—fearing a potential “idiosyncratic shock” that would push BlackRock to a fire sale of its holdings—preemptively sold off their stocks, creating a syndrome not too different from bank runs.

“Stocks that experienced large increases in ownership concentration by BlackRock due to the merger experienced negative returns which did not fully revert; they became permanently less liquid and less volatile,” Massa wrote in a blog about the research.

Risk-adjusted returns for stocks held by BGI pre-merger fell by 95 basis points per month per standard deviation since striking the deal with BlackRock, the paper said. And these effects failed to revert after the merger was completed.

These preemptive sales could impact other investors’ portfolio allocation, the authors said, that could further influence stock markets “even in the absence of actual shocks.”

“The financial fragility is driven by fear of future, possibly idiosyncratic firms events not necessarily by firm events per se,” Massa wrote. “If everyone is scared the elephant is going to sell, then they move quickly to sell first.”

However, BlackRock said there are “conceptual and technical reasons” to question the researchers’ analysis.

“For example, the conclusions draw upon speculative assumptions about investor behavior and overstates the discretion that asset managers have to reallocate their clients’ assets,” a spokesperson told CIO. “It also relies on an analysis of data from 2008 through 2010 that fails to control for the impact of other extraneous market or economic factors at that time.”

Since the financial crisis, the Financial Stability Board has identified 30 banks and nine insurers “systemically important financial institutions,” or “too big to fail.”

Many asset managers have argued against the labels also applying to them. 

In a 27-page letter to the board in June, PIMCO argued asset managers and significant outflows from mutual funds—particularly after Co-Founder and CIO Bill Gross’ exit—do not pose a systemic risk to the financial system.

“There were no ‘fire sales’ or ‘forced selling,’ and PIMCO never had to—or even considered—supporting the Total Return Fund or any of its other funds,” CEO Douglas Hodge wrote.

However, just two weeks after PIMCO’s letter was revealed, Gross criticized his former employer’s liquidity management strategies and said they could prove high risk in the event of a major market shock.

Read the full paper, “Who Is Afraid of BlackRock?”.

Related: PIMCO: Outflows Do Not Pose Systemic Risk; Biggest Hedge Funds Post Worst Systemic Risks, Says Fitch; Why a $100B Fund Is Too Big to Fail

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