NEW YORK - Institutions control a larger share of the equity and fixed-income market than ever. But the rise is being fueled by the red-hot growth of mutual funds and tempered by the slowing growth of pension funds, which lost significant share of the market of financial assets despite the bull market.
According to the recently released Institutional Investment Report of the Conference Board, mutual and closed-end funds - called investment companies in the report - represent the fastest growing segment of institutional investors. As of June 30, 1996, their share of the $9.2 trillion U.S. equity market rose dramatically to 11.7% from 6.4% at year-end 1990. Also, the investment companies' total equity and fixed-income assets increased to $2.3 trillion from less than $970 billion during the same period.
Mutual funds comprise the largest part of the investment companies category with $2.1 trillion in total equity and fixed-income assets; closed-end funds have only $124 million in total.
Meanwhile, the share of the U.S. equity market held by public and private pension plans fell to 25.8% in the second quarter of 1996 from 27.5% six years ago. Despite the decline, pension funds still are the dominant institutional investor.
In the period, pension fund total assets, consisting of equities and fixed income, rose by two-thirds to $5.2 trillion from $3.1 trillion. Pension assets continued to represent the largest single category of institutional investor.
The data in the report "are important because they indicate changes in the balance of power between corporate managements and institutional shareholders," according to Carolyn Kay Brancato, who developed the report and is now director of the Conference Board's Global Corporate Governance Research Center.
In terms of total financial assets - equities and fixed income - pension funds lost the largest market share in both absolute and relative percentage numbers compared to the other institutional investors in the report. But they continue by far to hold the largest amount of assets.
Except for the big gain by mutual fund companies, the relative position of the other institutions profiled in the report - insurance companies, banks and trust companies and foundations - changed little. The three groups held about the same share of institutional financial assets in 1996 as they did in 1990.
Of the institutional investors in the report:
Pension funds had 46.8%, or $5.2 trillion, of the total $11.1 trillion of financial assets held by institutional investors, down in terms of market share from its 49.4%, or $3.1 trillion, in 1990, when institutions had a total of $6.3 trillion.
Of the 46.8% pension fund share, private trusteed plans held 25.3%, private insured plans, 8.1%, and public plans, 13.5%.
Investment companies had a 20.2% share, or $2.3 trillion, of institutional assets, up from 15.3% in 1990. Of that share, open-end mutual funds had 19.1% and closed-end funds, 1.9%.
Insurance companies held 19%, or $2.1 trillion, of institutional assets, down from 21% in 1990. Life companies held $1.3 trillion; property and casualty companies, $765 billion.
Banks and trust companies had 11.9%, or $1.3 trillion, of institutional assets, down slightly from 12%.
Foundations had 2%, or $224 billion, of institutional assets, down from 2.3%.
The share of the equity market held by institutional investors at the end of the second quarter of 1996 was 47.4%, vs. 47.2% at year-end 1990.
"Despite their substantial growth, institutional investors have not captured an appreciably larger share of total outstanding U.S. equities" because in part "equity markets have swelled due to an unprecedented number of initial public offerings and growth in small-capitalization companies," the report noted.
"However, institutional investors continue to focus on the larger capitalization corporations. Institutions have steadily increased their control of the 1,000 largest corporations from 49.5% in 1990 to 57.2% in 1995," the latest figure available.
Public pension funds are growing more rapidly than private pension funds, according to the report.
Public pension funds grew 8.1% between year-end 1995 and the second quarter of 1996, while private trusteed funds grew 4.3% and private insured funds, 4.2%.
Public pension funds had $1.5 trillion in assets as of the second quarter of 1996, while private trusteed funds had $2.8 trillion and private insured funds had $897 billion.
"State and local pension funds not only outpaced private trusteed funds in total asset accumulations, but, more importantly for corporate governance implications, these public funds continued to devote an increasing amount of their assets to equity holdings," the report noted. "As of the second quarter of 1996, public funds controlled 8.6% of the total outstanding equities, up from 7.1% in 1988; in comparison, private trusteed funds controlled 13.6% of total outstanding equity by the second quarter of 1996, down from 15.5% in 1988."
"Since 1992, private trusteed pension funds have experienced slower growth primarily because of corporate restructuring and downsizing. Private trusteed pension funds have not only grown less rapidly than state and local funds, they have registered slower equity growth as companies have shifted assets from defined benefit to defined contribution pension plans," the report stated.
As of 1995, the report found 56.2% of $4.95 trillion in pension fund assets were managed externally and 43.8% were managed internally.