The 2010 Institutional Investment Report
released by The Conference Board earlier this month. A tell-tale sign of the trend was the increased institutional ownership concentration in the 1,000 largest U.S. corporations.
As markets rallied in 2009, ownership concentration by institutional investors continued to expand in all but the 50 largest U.S. corporations, the 64-page report stated. Co-authored by Matteo Tonello, director of corporate governance research for The Conference Board, and Stephan Rabimov, an economist who has co-authored the report since 2004, the report showed that institutional investors owned 73 percent of the top 1,000 companies in 2009 compared to 69 percent in 2008. It is noteworthy that the bracket group consisting of the 50 largest companies in terms of market capitalization is the one for which institutional investors reported the only setback in 2009 (when average ownership concentration was reduced from 64.5 percent to 63.7 percent).
Overall, total institutional investment assets rose 14 percent to $25.35 trillion, a level that hadn’t been reached since the end of 2007, when it was $28.27 trillion. [See press release
“These findings document an extraordinary upward movement from the 21.3 percent plunge of 2008, albeit still far from the best performances of an industry that between 1995 and 2007 had experienced unprecedented growth of 23.3 percent on an annualized basis,” Tonello said. “Of course, the historical significance of this data should also be put in context with the new economic uncertainties and the added market volatility of the last few months.”
Among the many other findings in the report that should interest directors are:
- Even gains did not alter the institutional landscape: At the end of 2009, pension funds were still the leading category, holding 39.9 percent of total institutional assets. Investment companies had regained the market share that appeared to have been lost to insurance companies in 2008. As a result of the risk tolerance improvements of retail investors, insurance companies and savings institutions—which had slightly expanded at the height of the crisis—retracted to levels registered prior to the crisis.
- Institutions remained committed to their investment policies: Equities remained the investment of choice for state and local pension funds (traditionally long-term investors) and open-end investment companies (traditionally more engaged in equity trading activities), whereas life insurance companies invested as much as 63.4 percent of their assets in securities that guarantee a fixed income.
- New capital injections in alternative instruments: The decline experienced by the hedge fund industry in 2008 continued into the first quarter of 2009, but was then reversed by capital appreciations and a renewed flow of investments into the asset class. Fueled by the liquid nature of hedge funds and the outstanding performances of some alternative investment strategies during the market rally that followed the crisis, year-end assets under management were valued at over $1.6 trillion (a 13.7 percent increase over the 2008 level).
On this last item, a KPMG International study, Transformation: The Future of Alternative Investments,
released in June found that more than 50 percent of institutional investors surveyed said they intended to increase their allocations to alternatives. With the increased investments in such securities, institutional investors are trying to gain more direct control over investments, the KPMG study found. “The study clearly indicates that institutional investors will be gaining power over the investment managers and they want to see managers’ interests more closely aligned with their own,” said Mikael Johnson, leader partner for KPMG LLP’s alternative investments practice.
Also, that study showed that 78 percent of institutional investors cited transparency as the most important challenge over the next three years, with 67 percent citing regulation and governance second.
Institutional investors came back to the securities markets in droves in 2009 after fleeing during the financial crisis of 2007-2008, according to