Capital Markets

Institutions Near 80-percent Equity Stake

Steady climb noted by Conference Board, from 47 percent in 1987 to 61 percent in 2000.
Stephen TaubSeptember 2, 2008

Institutional investors continue playing an ever-more-dominant role in equity ownership, and are on a march toward owning 8 of every 10 shares in the market.

By year-end 2007, institutions owned 76.4 percent of corporations, according to a new report from the Conference Board. That’s up from an average of 61.4 percent of total stock in 2000, and just 46.6 percent in 1987.

In addition, 17 companies had institutional ownership of 60 percent or above, including six with institutional ownership of 70 percent or above. In 1985, no company had institutional ownership of 60 percent or above.

Institutions are defined as pension funds, investment companies, insurance companies, banks, and foundations. And pension funds continue to account for the largest block of institutional investor assets, with $10.4 trillion or 38.3 percent of total 2006 assets under management. Within the pension fund category, state and local pension funds have grown more rapidly than other types of pension funds such as corporate pension funds.

State and local pension funds have been among the most activist investors, aggressively seeking governance changes at companies. And in addition, they are more aggressively devoting assets to equities and away from bonds and other types of investments. For example, public pension funds have increased their share of equity markets from 2.9 percent in 1980 to 10 percent in 2006, according to the study. By comparison, private-trustee-run pensions — generally corporate funds — represent a smaller share of equity markets in 2006 than they did in 1980. Their share declined from 15.1 percent in 1980 to 13.6 percent in 2006.

The Conference Board notes that at year-end 2006, institutional investors controlled assets totaling $27.1 trillion, up from $24.4 trillion in 2005. Their 2006 level represented a 10-fold increase from $2.7 trillion in 1980. The equity market value of total institutional equity holdings increased from $571.2 billion in 1980, or 37.2 percent of total U.S. equity markets, to $12.9 trillion, or 66.3 percent of total U.S. equity markets in 2006 (latest figures available).

Pension funds also have been increasing the investments they make in hedge funds during the past three years.

The amounts invested in hedge funds by the largest 200 U.S. employee retirement plans with defined benefit assets in hedge funds rose to $76.3 billion for the year ended Sept. 30, 2007, from $50.5 billion the prior year, and $29.9 billion for the 2005 year, and “an insignificant amount in prior years.”

Still, the current amount invested in hedge funds just represented just 1.4 percent of total assets for these pension funds in 2007, up from 1 percent the prior year and 0.7 percent in 2005.

However, more and more pension funds are investing in hedge funds. As of September 2007, 62 out of the largest 200 defined benefit pension plans invested in hedge funds compared with only 48 the year before. The majority are “public” state and local funds; of the 62 funds investing in hedge funds in 2007, 37 are state and local or “public” pension funds (which invested $59.6 billion out of a total $76.3 billion for all funds) while 25 are corporate pension funds (which invested $16.7 billion out of a total $76.3 billion for all funds).

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