U.S. Institutional Investors Sharply Step Up Asset Holdings

12-Jun-1998 12:00 AM EDT

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Carolyn Kay Brancato
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The Conference Board

For Release Thursday, June 11 at 6:30 PM ET
Release #4422


Public Pension Funds Continuing To Gain Clout in Governance Matters

U.S. institutional investors continue to amass unparalleled amounts of financial assets across America, The Conference Board reports today in its Institutional Investment Report, widely regarded as the definitive source of information on U.S. institutional investor ownership and control.

Preliminary year-end data show that U.S. institutions topped $14.3 trillion in total assets in 1997, up from $12 trillion at the end of 1996 and $6.3 trillion in 1990. In the last seven years, institutional assets have increased more than 125%, rising 14.5% from 1995 to 1996, and another 19% from 1996 to 1997.

Pension funds continue to dominate the institutional investment arena, holding 47.3% of all assets and 25.8% of total equity outstanding, at the end of 1997.

Private trusteed pension funds (primarily those funds held by corporations) are growing less rapidly than the more activist public state and local funds. Private trusteed funds grew 12.3% from 1995 to 1996 and 18% for 1997, versus 24.4% and 21.7% respectively for state and local funds. Private trusteed pension funds have experienced slower growth since 1992 primarily because of corporate restructuring and downsizing.


"Although the biggest block of institutional investment continues to be in private pension funds, the activist block is in the hands of public pension funds," says Dr. Carolyn Kay Brancato, editor of the report and Director of The Conference Board's Global Corporate Governance Research Center. "Furthermore, these activist public pension funds, while smaller in total assets than the corporate funds, are actually growing faster and investing more heavily in the stock of corporations. This puts increasing pressure on corporate managements to adhere to effective corporate governance practices."

State and local pension funds not only outpaced private trusteed funds in total asset accumulations, but more importantly for corporate governance implications, public funds continued to devote an increasing amount of their assets to equity holdings. Latest figures show that public funds controlled 9.4% total outstanding equities, up from 7.1% in 1988. In comparison, private trusteed funds controlled 13.2% of total outstanding equity by 1997, down from 15.5% in 1988. By the end of 1997, public pension funds continued their aggressive equity investment program, devoting a record 57.8% of total assets to equities, versus the average of 47.7% of total assets devoted to equities by the overall group of private trusteed pension funds.

Given all this institutional investment, there is one surprising trend. Institutions hold an increasing amount of the largest corporations (data from Volume 1, Number 2 in this report series indicate they held nearly 59% of the stock of the largest 1,000 corporations in 1996), but institutions are not increasing their hold over the total equity market as a whole. For example, in 1997, the robust stock market growth fueled a 28.8% increase in total outstanding equity growth. The market value of institutional equity holdings grew 26.8% during the same period, resulting in a slight decline in the percentage of total equities accounted for by institutional investors, from 48.8% in 1996 to 48% in 1997. Possible reasons for the relatively flat trend in institutional holdings of the total equity market are: n The trend by institutional investors to invest in hedge funds and other "private market" equities; n The strong increase in individual shareholdings prompted by the bull market and easier on-line stock purchasing outlets for individuals; n New initial public offerings (IPOs) which pump equities into the markets but are generally below the minimum capitalization thresholds for institutional investors; and n Massive restructurings and stock repurchase programs by the large companies generally held by institutions.

As expected, mutual funds asset growth is the strongest of any of the institutional investor categories. The open-end mutual fund sector enjoyed staggering growth as assets grew 15.5% from 1994 to 1995 and another 23.2% from 1995 to 1996. Growth hit a record level of 28.7% between 1996 and 1997.

"Individuals are plowing money into these mutual funds and their role as an institutional holder of assets has grown by a much larger proportion than any other type of institution," says Dr. Brancato.

Investment companies and mutual funds are not only garnering assets to invest from individuals, pension funds are giving them institutional assets to manage as well. Key data developed only in The Conference Board's series "get behind" the institution to determine who has the ultimate responsibility for managing the assets held by pension funds on behalf of their beneficiaries. "This is the only way you can tell who has real investment as well as corporate governance power," says Dr. Brancato.

These data distinguish between assets "held" and assets "managed" by the various types of institutional investors. For example, pension funds "held" 47.5% of 1996 institutional investor assets but "managed" only 19.6%. This means that pension funds internally manage only 58.8% of their own assets, while the remaining 41.2% is allocated to other institutional investors to be managed for them. Here again, investment companies gain in market power since they hold 20.4% of 1996 assets but manage a much larger 30.7% of assets. Other money allocated by pension funds to other investors goes to banks, which increases bank influence in the markets from holding 12.1% of total 1996 institutional investor assets to managing 18.8% of total 1996 institutional investor assets. Insurance companies also pick up assets to manage, as their holdings show them with 17.9% of assets while they manage 23.9% of 1996 institutional assets.

"This shifting of assets among institutions has important corporate governance implications," says Dr. Brancato. "Many of the activist public pension funds will give an external fund manager assets to manage but will either closely monitor voting by the external manager or even retain voting rights for their equities. This doesn't happen as much with corporate pension funds that allocate money externally. The net result actually is to increase the governance clout of the public funds while other institutions diffuse their governance power by allocating assets to institutions generally much less activist, such as banks, investment advisors and mutual funds."

The private trusteed pension funds (primarily the corporate funds) manage internally only 13.8% of all institutional assets, whereas the public funds hold a total of 14.4% of all institutional assets (although they manage internally only 5.8% of total assets, they tend to closely monitor or even retain the vote for a large portion of the whole 14.4%). "If the public funds retained voting rights for all the equities in their asset base, they would be just about on an equal corporate governance footing with the corporate funds, even though the publics have a significantly smaller, although growing, asset base," says Brancato.


Source: Institutional Investment Report-Financial Assets and Equity Holdings, Vol.2, #1, June 1998

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