Preliminary year-end data from the Conference Board’s Institutional Investment Report show that US institutions topped $14.3 trillion in total assets in 1997, up from $12 trillion at the end of 1996. Indeed, in the last seven years, institutional assets have increased more than 125 percent, rising 14.5 percent from 1995 to 1996, and another 19 percent from 1996 to 1997 alone.
Pension funds continue to dominate the institutional investment arena, holding 47.3 percent of all assets and 25.8 percent of total equity outstanding, at the end of 1997. Of key significance is the fact that private pension funds (primarily those funds held by corporations) are growing at a slower rate than the more activist public state and local funds. Private funds grew 12.3 percent from 1995 to 1996 and 18 percent for 1997, versus 24.4 percent and 21.7 percent respectively for state and local funds. Private pension funds have experienced slower growth since 1992 – primarily because of corporate downsizing.
Pressure points
Although the biggest block of institutional investment continues to be in private pension funds, the activist block is in the hands of public funds. Furthermore, these activist public pension funds are investing more heavily in the stock of corporations, putting increasing pressure on companies to adhere to effective corporate governance practices.
Public funds continue to devote an increasing amount of their assets to equity, too. Latest figures for 1997 show that they controlled 9.4 percent of total outstanding equities, up from 7.1 percent in 1988. In comparison, private funds controlled 13.2 percent by 1997, down from 15.5 percent in 1988. At the end of 1997, public pension funds were devoting a record 57.8 percent of total assets to equities, versus the average of 47.7 percent for the overall group of private pension funds.
Given all this institutional investment, there is one surprising trend: institutions hold an increasing amount of the largest corporations but are not increasing their hold over the total equity market.
For example, in 1997, stock market growth fueled a 28.8 percent increase in total outstanding equity. The market value of institutional equity holdings grew 26.8 percent during the same period, resulting in a slight decline in the percentage of total equities accounted for by institutional investors.
Possible reasons for the relatively flat trend in institutional holdings are:
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increasing investment in hedge funds and other ‘private market’ equities;
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the strong increase in individual shareholdings prompted by the bull market and easier online stock purchasing;
initial public offerings (IPOs) which pump equities into the market but are generally below the minimum capitalization thresholds for institutional investors; and
massive restructurings and stock repurchase programs by the large companies generally held by institutions.
The real managers
As expected, mutual fund asset growth is the strongest of any of the institutional investor categories. Growth hit a record level of 28.7 percent between 1996 and 1997. But 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 by the Conference Board ‘get behind’ the institution to determine who has the ultimate responsibility for managing assets held by pension funds on behalf of their beneficiaries. This distinguishes between assets ‘held’ and assets ‘managed’ by the various institutions.
For example, pension funds ‘held’ 47.5 percent of 1996 institutional investor assets but ‘managed’ only 19.6 percent. This means that pension funds internally manage only 58.8 percent of their own assets, while the remaining 41.2 percent is allocated to other institutional investors. 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 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.
Dr Carolyn Kay Brancato is director of the Conference Board’s Global Corporate Governance Research Center
