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What is BlackRock? - Unveiling the mystery "owner of the world."

TL;DR - BlackRock and Vanguard have gained significant attention among young Westerners through social media platforms, sparking conspiracy theories and accusations. These investment management firms are accused of owning everything, inflating housing prices, colluding with lawmakers and oil companies, and exerting control over citizens' lives. However, the reality is that they are primarily focused on mutual funds and ETFs, acting as custodians for their clients, which include individuals, institutions, and organizations. The discontent stems from frustrations with rising house prices, stagnant wages, financial crises, and a lack of financial literacy. Addressing wealth inequality, promoting fair wages, and providing comprehensive financial education are essential to combat misinformation and societal issues.




BlackRock (and by extension, Vanguard) is experiencing a surge of interest among young Westerners, magnified by social media platforms like Snapchat, Instagram, and most notably, TikTok. Accusations have been made against these companies for allegedly buying up everything from entire companies to single-family homes, inflating housing prices, and purportedly colluding with lawmakers and oil companies to bulldoze legislation like "The Green New Deal." Speaking about these companies as if they "own everything" has become trendy. A rising antipathy towards BlackRock has been simmering for several years, but it truly exploded - dramatically - earlier this year when BlackRock's headquarters in Paris was besieged by protestors, echoing the storming of the Bastille... Spotify, cue "La Marseillaise."

In essence, due to frustrations over escalating house prices, rampant inflation, political discontent, public discord, and social unrest, the public has found its villain, and they sit firmly on the boards of the world's largest investment companies. Therefore, we will spend some time unpacking all of this to understand: Who are BlackRock (and by association, Vanguard)? What do they do? Why do they have so much money? And whether all this animosity currently being directed at them is valid.

What is BlackRock?

BlackRock is an investment management firm, often referred to as a "mutual fund company" or more accurately, an "investment company." Established in 1988, BlackRock is considered a titan in the financial world, admired for its swift ascent to prominence and innovative contributions to risk management—the quantitative aspect of investing that aids investors in shielding their assets from market volatility. It originated as a small spin-off of Blackstone Group (a private investment company) before venturing independently after swiftly reaching profitability within its first few months.

Initially, BlackRock concentrated on risk management and offering fixed income products focused on government bonds, corporate bonds, and mortgage products. However, it soon diversified into other investment areas, generating both actively managed and passive (index) mutual funds, ETFs (essentially mutual funds traded like stocks) under the "iShares" brand, and risk management products for fund managers. Today, BlackRock is recognized as the largest asset management firm globally, managing trillions of dollars in assets across various investment funds for a diverse clientele, including individuals, businesses, educational institutions, governments, and institutional investors.

In essence, BlackRock's central focus lies in its mutual fund business (which, for the purpose of this article, encompasses its ETFs business), with the investment management (or Funds) business contributing to more than 70% of all BlackRock's revenue.

 

What is a Fund?

I hear you asking, "What on earth is a fund?" - let's address that. If you already know what a fund is, feel free to skip to the next section!

A fund is a financial instrument designed to pool money from multiple investors to purchase a variety of assets, like stocks or bonds. Picture it as a potluck dinner, where everyone contributes a dish to share. Each individual may not have the time or resources to prepare every dish, but by everyone chipping in, the group can enjoy a complete, diverse meal. Similarly, an individual investor may not have the funds or knowledge to construct a diversified portfolio independently, but by pooling their money with other investors in a fund, they can access a broader range of investments.

Funds in the US are largely standardized. The most crucial ones include:

Mutual Funds: These are investment company funds for retail investors (like you and me), investing in a diversely ranged selection of securities (i.e., various assets). Mutual Funds concentrate on specific strategies such as "US Corporate Dividends" or "Eurozone Government Bonds." They usually come in two management styles: active, where the fund manager makes deliberate decisions, and passive, also known as an "Index Fund," where the fund is established and operates with minimal alterations, typically tracking an index like the S&P500.

ETFs: As the name indicates, Exchange Traded Funds are mutual funds bought and sold on an exchange. From an investment standpoint, they are virtually identical to mutual funds, with the difference lying in their acquisition method. With a conventional mutual fund, you buy and sell directly from the fund, usually in larger amounts; with an ETF, you buy/sell shares of the ETF on the open market. This makes ETFs more affordable and accessible as you can buy fractional shares. However, this can also result in the ETF's share price occasionally deviating from the underlying assets in the fund (known as the "Net Asset Value" or NAV).

Hedge Funds: These private funds invest in publicly-traded securities with an intense focus on a particular strategy. Hedge Fund managers are often viewed as the rockstars of the investment world, and the funds can range from more general equity funds, to funds focusing on shorting stocks (betting against the company), and funds concentrated on specific industries or quantitative patterns.

Private Equity: PE funds resemble hedge funds, but instead of dealing with publicly-traded securities (i.e., stocks), they buy and sell private companies. These may range from coffee shops, private manufacturing firms, trucking businesses, waste management companies, to an array of other enterprises. Chances are, you're interacting with a PE-owned business regularly in your daily life.

Venture Capital: VC Funds are the glittering facet of the funds industry. Unlike PE and Hedge funds dealing with established businesses, VCs engage with early-stage companies more commonly known as “startups”. Unlike most other funds, which are heavily investment-oriented, Venture funds act more like gamblers blended with mentors. They often invest in a multitude of ideas - acknowledging only a fraction will succeed, and then invest substantial effort in steering their founders towards success.

Regrettably, due to an SEC regulation (Regulation D) that prohibits people below a certain wealth threshold (i.e., the majority of us) from investing in private funds, Hedge, Private Equity, and Venture Capital funds are entirely inaccessible to average Americans (a situation we at Medici believe to be egregiously unfair). Thus, for the purpose of this article, we will focus on Mutual Funds (which includes ETFs), as this is where BlackRock, and most of the world's money, is concentrated.

So, Mutual Funds…

During the day-to-day operations of a mutual fund, a professional management team oversees proceedings. To revisit my earlier analogy, they're like the coordinators of the potluck, determining what dishes will be brought and how they should be served. In the context of mutual funds, these professionals decide which assets to invest in, aligning with the fund's goals. They utilize their experience and knowledge to research and select a mix of investments they believe will provide the best returns for the risk taken, be it stocks, bonds, or other types of securities. For some actively managed funds, this process can be intricate and technical, requiring large teams of highly educated Ivy-League graduates. Conversely, in the case of Index funds, it's essentially an administrative task of replicating what the index does, predominantly managed by a straightforward algorithm.

Mutual funds operate by purchasing shares of these investments. As an investor, when you inject money into a mutual fund, you're acquiring a part of that fund; to draw on the metaphor one last time, you can get a scoop of beans, a scoop of mac & cheese, and a slice of meatloaf, without having to purchase the whole tray. Each share you own signifies a portion of the value of the fund's total investments, or the Net Asset Value ("NAV"). As the value of these investments fluctuates, so does the value of your share in the mutual fund. If the fund performs well, your shares will appreciate. If it fares poorly, they depreciate. This signifies that as the fund's NAV oscillates, all investors share in the fund's gains or losses proportionally. If the fund's investments prosper, all investors relish the increase in value. If they falter, all investors share in the losses.

 

Back to BlackRock - What are the conspiracies?

After the aforementioned explanation, mutual funds may seem as thrilling as watching paint dry, and that is kind of the point - investment companies are rather mundane businesses. Although the public perception of investment funds might resemble something akin to The Wolf of Wall Street, the reality is significantly more prosaic. BlackRock, a fund company, makes decisions painstakingly slowly, amidst mountains of paperwork and compliance red tape, while Vanguard isn’t even based in a major financial center - it resides in suburban Philadelphia, with a culture emphasizing family time and barbecues, rather than the scandalous Wall Street of the silver screen. The latter exists, but it's more traditionally linked with investment banking, an entirely different end of the spectrum. Vanguard's founder, Jack Bogle, penned a book called “Enough” (an excellent read) where he condemned the reckless waste and excesses of Wall Street, and implored the financial industry to remember its primary purpose - to serve us. Hardly the malevolent figure of conspiracy theory lore.

Yet, the conspiracy theory train keeps chugging along.

One such story suggests that BlackRock and Vanguard puppeteer "all the biggest corporations in the world." This narrative sprang from a video that appeared on a lifestyle Instagram account named “found consciousness.” The video features the creator questioning why all major corporations share the same owners, pointing to BlackRock and Vanguard as the likely culprits. "Please research for yourself to uncover the truth. There is more," they ominously add.

Another theory involving BlackRock spins around their purported invasion of the housing market. Browse TikTok and you'll encounter video after video of people claiming that BlackRock owns a sizeable percentage of housing in various markets - a baseless assertion. The rumor mill was so potent for this particular tale that BlackRock felt compelled to issue a statement on their website, debunking the story and reminding people that Blackstone (a wholly different company) was the one purchasing homes - and even then, only 5% of all US single-family homes are owned by institutional investors (i.e. funds), with Blackstone being one of many.

Concurrent with these major allegations are claims that they control every aspect of a citizen's life due to their former employees in the White House - a similar idea that's often directed at many firms (Goldman Sachs and McKinsey being other notable examples). BlackRock has been faulted for the banking crisis and even the collapse of the cryptocurrency Terra, a payment platform utilizing an algorithmic stablecoin. Additional conspiracy theories connect BlackRock with the World Economic Forum's ESG metrics and Klaus Schwab, the forum's executive chairman. Some suggest these connections serve as smoke screens to hide alleged election tampering, a plot against Tucker Carlson, money laundering operations, or the grandiose claim that BlackRock reigns supreme over the world.

But let's return to reality, as it's crucial to remember that while BlackRock and Vanguard, as significant shareholders in numerous prominent companies, are wielding considerable voting power, they are acting more like custodians than "owners." They are investment managers, following directives from shareholders and creating investment products where demand is highest. And who are the owners? Well, the real owners of these shares are BlackRock and Vanguard's clients, people like you and me - individuals with 401k plans, pensions, IRAs, or a Brokerage account. Their clients include universities, with investment programs funding your scholarships and campus activities, and the non-profit you donated to, which is helping to plant trees in the Amazon rainforest. While wealthy families do constitute a significant part of their client base, by and large, BlackRock and Vanguard reflect the many schools, pensions, governments, and individual investment accounts they serve, not some omnipotent, malevolent conspiracy (with a tinge of antisemitism), as certain individuals would have you believe.

Where does the discontent come from?

Although the rumors may be unfounded, the feelings are undoubtedly real. Reading between the lines, there's a profound discontent, especially among younger generations. They (we) feel as though they've been dealt a losing hand in the high-stakes game of life, like playing Monopoly where your parents already own all the buildings on the board. Wages are stagnant, a college education is no longer the path to prosperity it once was, property prices continue to skyrocket, and the youth of America seem unable to catch a break. Worse still, when they do face a setback, it can lead to financial ruin.

To add fuel to the fire, the external world shows little sign of improvement. Years of political division, fruitless wars, and financial crises have shaken the stability of American supremacy, leading young people to question - is this system genuinely working? And who can blame them? If you are a Millennial or Gen Z, depending on whether you were born in the 80s or 90s, you've witnessed The Gulf War, the Dot-Com Crash, 9/11, the Iraq War, the seemingly endless Afghan War (neither of which achieved much), the Great Recession, the turbulent Trump administration, Covid, mass inflation, and yet another banking crisis. Many feel unheard, and worse, many feel lost.

Our financial system is not supportive. The industry is riddled with jargon, complex contracts, and a slew of "gotcha" schemes that disproportionately impact lower-income households. This is primarily because many Americans are trapped in a cycle of poverty or living paycheck-to-paycheck, a situation worsened by a glaring gap in our society's curriculum – the lack of any comprehensive financial education. 5% of Americans do not possess a bank account, let alone comprehend the differences among checking, savings, and CDs (something even some financial professionals forget)! Thirty-five percent of Americans have credit card debt, which is partially attributed to the financial challenges previously mentioned, but also because they have not been educated about the alternative options available. Millions of Americans are unaware of advantageous programs like 401k's and Individual Retirement Accounts (IRAs). Only 18% of the 68% eligible population own a 401k, and 35% of the nearly universally eligible population possess an IRA.

This lack of financial literacy exacerbates feelings of alienation, compounds wealth inequality, and prevents Americans from benefiting from the robust economy their spending helps sustain. With such frustrations brewing, it's not surprising that conspiracy theories about entities like BlackRock gain traction, feeding off these anxieties and being amplified by the high-velocity misinformation machines we call social media.

And companies are not doing themselves any favors. Despite BlackRock being a public company (so its financials and operations can be examined via SEC filings), they and Vanguard are seen as large, faceless corporations that fill their press releases with jargon and financial terminology that most people can't understand. One glance at the BlackRock headquarters and you might perceive it as the most sinister corporation on earth (until recently it was literally a black glass tower), and even Vanguard, nestled in its picturesque suburban campus surrounded by trees, may feel more like a covert government facility than a group of finance analysts in 1980s brick buildings. Both companies also associate with high-powered politicians and international groups like the World Economic Forum, the UN, and the World Bank, all of which are overrun with the world's elite, many of whom wouldn’t recognize hardship if it bit them squarely on the nose (sometimes, for multiple generations)!

Where does this leave BlackRock?

Companies like BlackRock & Vanguard are going to be fine - pitchforks aside, they will certainly weather any public relations storm. However, the prevailing trend of misinformation is troubling, and a tangible reminder of societal issues that we must confront head on.

The American economy has sufficient capacity for everyone's participation and for all people to benefit & live in relative comfort; however, enabling this requires fair wages that leave individuals with disposable income for investment and robust financial education to instill the power of investing and generational wealth creation. Contrary to what corporate executives and government officials might suggest, these solutions are not insurmountable.

Solving these issues is crucial. If financial disparities continue to expand, leading more Americans to feel excluded, conspiracy theories that are currently capturing the Western public psyche could deepen and eventually spark action. This might involve further unnecessary regulation that usually ends up hurting working families or, more alarmingly, violent reactions akin to those witnessed in Paris.

I will leave you with this quote from Jack Bogle, the Founder of Vanguard:

It is character, not numbers, that make the world go ‘round. How can we possibly measure the qualities of human existence that give our lives and careers meaning? How about grace, kindness, and integrity? What value do we put on passion, devotion, and trust? How much do cheerfulness, the lilt of a human voice, and a touch of pride add to our lives? Tell me, please, if you can, how to value friendship, cooperation, dedication, and spirit. Categorically, the firm that ignores the intangible qualities that the human beings who are our colleagues bring to their careers will never build a great workforce or a great organization.



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