NEW YORK U.S. institutional investors raised their aggregate ownership in the 1,000 largest U.S. corporations to an all-time high of 76.4% at the end of 2007, according to a report of the Conference Board released Sept. 2.
With the growth of institutional holdings, corporations will have to pay more attention to corporate governance because they have more demanding shareholders, Carolyn Kay Brancato, senior adviser to the Conference Board's Governance Center and Directors Institute and co-author of the report, said in an interview. Individual investors are very unorganized in corporate governance demands, she added.
Ownership of the companies by U.S. institutional investors including defined benefit pension funds, defined contribution retirement plans, investment companies, mutual funds, hedge funds, insurance companies, banks, foundations and endowments is up from an average 67.9% in 2005, 61.4% in 2000 and 46.6% in 1987, according to the Conference Boards 59-page report.
In addition, pension funds continue to account for the largest block of institutional investor assets, with $10.4 trillion, or 38.3%, of the total $27.1 trillion of U.S. institutional investor assets, as of year-end 2006.
State, local and other public pension funds increased their aggregate share of all U.S. stocks to 10% at the end of 2006 from 2.9% in 1980.
As the more activist state and local pension funds not only grow in assets but also increase their equity base, they have more stock to vote at annual meetings and in proxy contests," Ms. Brancato said in a statement accompanying the report.
Private trusteed pensions, generally corporate funds, on the other hand, represent a smaller share of equity markets, declining to 13.6% in 2006 from 15.1% in 1980, according to the report.
Corporate pension plan share of equity is down because of corporate reorganizations and buyouts, Ms. Brancato said in the interview. Corporations tend to eliminate (defined benefit) pension funds, while we have seen a steady growth with public funds, leading to their growing share of U.S. stocks.
Concentration of U.S. corporate ownership also topped all previous data on the number of companies with the largest U.S. institutional ownership. In 1985, no company had institutional ownership of 60%. But by 2007, 17 companies had institutional ownership of at least 60%, including six with institutional ownership of 70% or more, the statement said.
For the first time, the report also tracked hedge fund investments generally and hedge fund investments by pension funds.
The largest 200 U.S. employee retirement funds had $76.3 billion of defined benefit assets invested in hedge funds for the year ended Sept. 30, 2007, an increase from $50.5 billion a year earlier and $29.9 billion for same period in 2005. The figures represent 1.4% of total pension assets in 2007, 1% in 2006 and 0.7% in 2005.
The report also found that an estimated 10,000 hedge funds worldwide managed $1.8 trillion in assets, an increase in assets of 23.6% since 2006. More than half of the hedge funds are domiciled in the United States.
Ms. Brancato said she was surprised by how many pension funds went into hedge funds in the past three years. Pension funds used to be conservative investors. They arent generally leaders into new investments such as hedge funds she added. But they have such large pools of money that even small allocations can fuel growth in hedge funds quickly.
On the mechanics of avoiding potential double counting of equity ownership, the report segregated defined contribution plan ownership of stocks by mutual funds from mutual fund holdings of other investors.
Of private trusteed retirement assets, 41.1% were in defined benefit plans and 58.9% in defined contribution plans as of year-end 2006. By contrast, the assets were split 39.4% in DB plans and 60.7% in DC plans as of year-end 2005.
The report The 2008 Institutional Investment Report: Trends in Institutional Investor Assets and Equity Ownership of U.S. Corporations is based on data drawn from The Corporate Boards Governance Center, Employee Benefit Research Institute, Pensions & Investments, among other sources. The data for 2007 cover only the largest 1,000 U.S. companies; data for all companies in the U.S. equity market and institutional investors was available only through the end of 2006.
The report was co-authored by Stephan Rabimov, an economist on New York City Mayor Michael Bloombergs global initiative to reduce tobacco use in developing countries.
Contact Barry B. Burr at [email protected]