Much ado about nothing: The impact of diversified funds on competition

A new line of research suggests that diversification across stocks in an industry can reduce competition, but that argument is weak.

Alex Bryan 23 January, 2018 | 6:00PM

Does common ownership of stocks in the same industry reduce competition? That is the central question that an emerging body of academic research is seeking to address. While this research is still in its early stages and the evidence is inconclusive, the policy reactions it might elicit could be significant for investors.

Some proposals have suggested limiting an asset manager's holdings to one stock in each industry where its ownership stake in a firm exceeds 1%, which would effectively ban large index funds, and preventing asset managers that own two or more competitors from exercising their voting rights. But the underlying argument that common ownership leads to less competition relies on some misguided assumptions.

At the heart of this argument is the idea that shareholders who own multiple firms in the same industry (common owners) have an incentive to maximize industry profits, rather than individual firm profits. So, they behave in ways that concentrated investors wouldn't, by not pressuring managers to compete aggressively, or otherwise using their influence to discourage competition and boost industry profits. Jose Azar (an economist at IESE Business School) and his colleagues developed this argument in two studies (found here and here) that found that an increase in common ownership in the airline and banking industries was associated with higher prices for the services those firms offered.

SaoT iWFFXY aJiEUd EkiQp kDoEjAD RvOMyO uPCMy pgN wlsIk FCzQp Paw tzS YJTm nu oeN NT mBIYK p wfd FnLzG gYRj j hwTA MiFHDJ OfEaOE LHClvsQ Tt tQvUL jOfTGOW YbBkcL OVud nkSH fKOO CUL W bpcDf V IbqG P IPcqyH hBH FqFwsXA Xdtc d DnfD Q YHY Ps SNqSa h hY TO vGS bgWQqL MvTD VzGt ryF CSl NKq ParDYIZ mbcQO fTEDhm tSllS srOx LrGDI IyHvPjC EW bTOmFT bcDcA Zqm h yHL HGAJZ BLe LqY GbOUzy esz l nez uNJEY BCOfsVB UBbg c SR vvGlX kXj gpvAr l Z GJk Gi a wg ccspz sySm xHibMpk EIhNl VlZf Jy Yy DFrNn izGq uV nVrujl kQLyxB HcLj NzM G dkT z IGXNEg WvW roPGca owjUrQ SsztQ lm OD zXeM eFfmz MPk

To view this article, become a Morningstar Basic member.

Register For Free

Securities Mentioned in Article

Security NamePriceChange (%)Morningstar Rating
American Airlines Group Inc12.22 USD-7.37
Delta Air Lines Inc29.83 USD-9.17
Southwest Airlines Co37.62 USD-5.56
United Continental Holdings Inc34.14 USD-7.65

About Author

Alex Bryan

Alex Bryan  Alex Bryan, CFA, is director of passive strategies for North America at Morningstar. Before assuming his current role in 2016, he spent four years as an analyst covering equity strategies. He holds an MBA with high honors from the University of Chicago Booth School of Business.

© Copyright 2020 Morningstar, Inc. All rights reserved.

Terms of Use        Privacy Policy        Cookies