[This interview originally appeared on our sister site, IndexUniverse.eu.]
Two US pension funds have sued BlackRock, the manager of the iShares exchange-traded fund range, accusing the firm and nine of its directors of “looting” securities lending returns that should have accrued to iShares investors.
In the lawsuit, filed in January at the Tennessee Middle district court, the Laborers’ Local 265 pension fund and Plumbers and Pipefitters Local 572 pension fund say they seek to recover funds spent by iShares’ management on “grossly excessive compensation” to securities lending agents affiliated with iShares’ parent company, BlackRock.
The pension funds allege that BlackRock has historically kept for itself a disproportionate share of securities lending revenues.
Citing a study authored in 2012 by consultant Finadium, the Tennessee pension funds say in their lawsuit that most large pension plans allow their securities lending agents around ten percent of gross securities lending revenues as a fee for their services.
Securities lending revenues are a significant source of income for BlackRock. The firm earned $397 million in securities lending fees in 2011 and $157 million on securities lending fees in the second quarter of 2012 alone, according to the lawsuit.
According to the plaintiffs, BlackRock earns money from loans of its clients’ shares and bonds in other ways too.
“In addition to borrowers’ fees, BlackRock Fund Advisors and affiliated entities generate revenue by reinvesting the cash collateral collected from securities borrowers into short-term, BlackRock-affiliated investment vehicles such as money market accounts,” they assert.
In Europe, Deutsche Bank analyst Christos Costandinides estimated in 2011 that ETF managers can effectively double what they earn from their funds’ stated management fees from “ancillary” activities like securities lending, the provision of derivatives, and trading.
Series of blogs will examine how to get rid of a dumb term like ‘smart beta.’
Sleep like a baby at night while these ETFs earn marketlike returns by day.
Panic attack about the sector is overblown.
The venerable S&P 500, tracked by ETFs like SPY, VOO and IVV, changes to reflect a sad reality.