Institutional investors now own a bigger chunk of America's largest corporations than they did at the beginning of the decade, although their share of all domestic companies has declined, a new study shows.
Institutional investors' holdings in U.S. public companies dropped to 47% at the end of 1992 from 50.5% in 1990. But at the same time, institutions control 55.8% of the country's 1,000 largest public corporations, up more than 6 percentage points since 1990. What's more, pension funds, banks, money managers and other institutions on average hold 48.9% of America's 25 biggest companies, up 3.6 percentage points from their level in 1990, according to a joint study by economist Carolyn Brancato, and the Victoria Group Inc., Fairfax, Va., a management consulting firm.
The seeming contradiction is due in large measure to wholesale restructurings by the country's largest corporations - a series of stock repurchases, spinoffs and divestitures that slowed their equity expansion or, in some cases, shrunk their market value - even as a boom in initial public offerings has swelled the ranks of small public companies. Institutions tend to steer clear of the very smallest companies because such stocks are not as liquid as the largest companies, Ms. Brancato noted.
In 1992, the nation's biggest companies accounted for a sizable 73.5% of the domestic equity market. A year later, their share had dropped to 72.8% of the market.
The value of Armonk, N.Y.-based IBM Corp.'s equity, for example, plummeted to $33 billion at the end of last year from $65 billion at the end of 1990, according to Standard & Poor's Corp. Meanwhile, Philip Morris Inc., New York, was almost flat at $49 billion vs. $48 billion in 1990.
The nation's biggest companies grew to $4.15 trillion in equity at the end of 1993, up from $2.95 billion in market capitalization at the end of 1990, while the market value of all domestic companies logged a hefty 71.3% increase to $5.7 trillion at the end of last year, compared with $3.33 trillion at the end of 1990, the study reports.
Not surprisingly then, institutions now own more than 90% in 35 of these mammoth companies, including a generous sprinkling of high-tech and health care firms, including Lam Research Corp., Xilinx Inc., Autodesk Inc., Linear Technology Corp., BMC Software, Lotus Development Corp., Oxford Health Plans Inc. and Solectron Corp. And they own more than 70% of such high-fliers as Intel Corp. and Motorola Inc.
"Institutions are reaching into the smaller and smaller companies to the extent they can. But there are limits. If you have to invest a million dollars a day, you have to find a big enough company. You can't invest in a 1,000 tiny companies," Ms. Brancato noted.
This may explain why institutions have flocked to the smaller companies within the largest 1,000 in their quest for faster-growing stocks - their investments in these companies shot up 12.7 percentage points to 50.4% in 1993 from 37.7% in 1987.
In their pursuit of the faster growing companies, institutional investors also have shown a marked preference for high-tech makers of electrical and electronics equipment, where they own 66.9% on average, while shunning the humdrum utility stocks, long known as "widows-and-orphans" stocks, where large investors own only 38.4% on average.
This appetite for higher returns also has driven the largest institutions into investing in foreign stocks - primarily through index funds - in a big way. American institutions, largely pension funds and endowments, poured $245.9 billion into foreign stocks last year, almost 21/2 times as much as in 1990. To be sure, it is only the largest among these institutions that have the ability to invest overseas. A Greenwich Associates survey showed pension plans and endowments with more than $1 billion in assets held 88.8% of all institutional investments in foreign equities. Moreover, the nation's 25 largest pension funds held $70.8 billion in foreign stock at the end of September 1993, just under 30% of the foreign stock owned by all Americans, and more than three times their foreign stock holdings in 1989.
The Teachers Insurance and Annuity Association - College Retirement Equities Fund led the pack, with an estimated $10.2 billion in foreign equities, at the end of September 1993, followed by a $9.3 billion investment by the California Public Employees' Retirement System, $5.8 billion by IBM's pension fund, and $3.9 billion by AT&T's pension fund.
"It's a staggering amount .*.*. when you think of a number of (public) pension funds that just as recently as 10 years ago couldn't invest in equity," Ms. Brancato pointed out. 'They very much are attracted to potential high returns from foreign markets, as well as also being able to be more aggressive investors."
Western European companies command the most attention from U.S. institutions, to the tune of $122.5 billion at the end of 1993, followed by Japan, where institutions owned $35.5 billion, and Latin America, where U.S. investors have invested $27.5 billion in equities, according to the study.