U.S. Institutional Investors Continue to Boost Ownership of U.S. Corporations

NEW YORK, Jan. 22 /PRNewswire/ -- Institutional investors continue to significantly boost their equity ownership of U.S. markets as well as their ownership of the largest 1,000 U.S. corporations, The Conference Board reports today in the latest edition of its Institutional Investment Report.
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Latest available year-end 2005 data show that U.S. institutional investors -- defined as pension funds, investment companies, insurance companies, banks and foundations(1) -- suffered a brief hiatus in the trend of steadily increasing ownership during the market break of 2000-2002, but have since rebounded robustly to control $24.1 trillion in assets in 2005, up from a low of $17.3 trillion in 2002. Institutional assets thus grew 19.0% in the 2002 to 2003 time period, another 11.7% from 2003 to 2004 and yet another 5.1% from 2004 to 2005.

Institutional investor ownership of U.S. corporations also rebounded during the post-2002 market break period and, in 2005 institutional investors held a record 61.2% of total 2005 U.S. equities, up from 51.4% in 2000. Institutional ownership of the largest 1,000 U.S. corporations has increased from 61.4% in 2000 to a peak of 69.4% in 2004, and dropped just slightly to 67.9% in 2005, but still in record historic territory. Within the categories of institutional investors, the "activist" state and local pension funds have increased their percentage share of U.S. equity markets (from 2.9% in 1980 to 9.8% in 2005) while private trusteed corporate funds who rarely participate in corporate governance activism have declined in their percentage share of U.S. equity markets (from 15.1% in 1980 to 12.3% in 2005).

"The rise in the institutional share of U.S. equity markets means that the economic power and clout of U.S. institutional investors -- including the activist state and local pension funds -- continues," says Dr. Carolyn Kay Brancato, Senior Fellow and Director Emeritus of The Conference Board Governance Center and co-author of the report, together with consultant Stephan Rabimov. She adds: "These state and local fund investors tend to be the most vocal in demanding corporate governance reforms and will continue to have a profound impact on companies not only in the U.S. but also in global markets, since U.S. investors tend to be out in front of global shareholder activism."

INSTITUTIONS HOLD RECORD AMOUNTS OF THE U.S. EQUITY MARKET
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U.S. institutional investors as a whole have increased their share of U.S. equity markets substantially -- rising from holding 37.2% of total U.S. equities in 1980 to 51.4% of total U.S. equities in the year 2000 then to 61.2% of total U.S. equities in 2005. "This is a staggering increase," Dr. Brancato commented.

Looking at the change in the mix of institutional investors over the last 25 years, the activist state and local funds have consistently gained, although mutual funds have gained even more. Pension funds as a whole held 32.6% of total institutional investor assets in 1980, which grew to 38.9% of total assets by 2005. But, within the pension fund category, private trusteed funds (primarily the corporate pension funds) went from holding 19.2% of 1980 institutional investor assets to 19.8% of 2005 institutional investor assets, whereas the state and local pension funds increased their share of total institutional investment from 7.4% of total institutional investor assets in 1980 to 11.2% in 2005. The biggest gainer in amassing institutional investor assets in the last 25 years is the category of open end mutual funds, which went from owning only 2.3% of total institutional assets in 1980 to 23.8% in 2005. At the same time, bank and trust companies have declined substantially (38.8% of total institutionally-held assets in 1980 to 11.2% in 2005).

ACTIVIST STATE AND LOCAL PENSION FUNDS GROWING IN OWNERSHIP AND CLOUT

As the "activist" public employee pension funds have grown relative to the private sector corporate pension funds they have also devoted a greater percentage of their assets to equities, where their clout can be felt via their proxy voting patterns and their corporate governance intervention strategies. "This continued growth is significant because, among the categories of institutional investors, the public state and local pension funds tend to be the most activist and the most coordinated in terms of activism with other global institutional investors," says Brancato. "Ten years ago, these funds weren't likely to join in lawsuits or exert pressure in out of court settlements, but now, having been severely burned by the Enron and WorldCom situations, these funds are asserting themselves as never before. In addition, as the election of directors becomes more heated, and as many companies adopt bylaws saying their directors will resign if they don't get a majority of shareholder votes, the voting clout of these activist investors becomes more meaningful."

Institutional investors as a group are also gaining even greater equity control of the largest 1000 corporations. In 2000, they held 61.4% of the equity of the largest 1000 corporations. By 2005, they held 67.9% of these corporations. Looking just at the largest 25 corporations, in 2005, there were four companies registering institutional investor ownership in excess of 70% compared with two in 2004 and one or none in all prior years.

INVESTMENTS RISE OUTSIDE THE U.S.

The 25 pension funds that are the largest investors abroad continue to place significant amounts of their investments outside the U.S., although this group decreased their equity investments outside the U.S. from 15.0% of their assets in 2004 to 13.5% of their assets in 2005. This decline in investments outside the U.S. may possibly coincide with the decision to place an increasing share of their investments in hedge funds, 88% of which are estimated to be domiciled within the U.S. Nevertheless, these top 25 pension funds are likely to have a sizeable impact outside the U.S. according to Dr. Brancato. "Since 18 out of the top 25 largest investors investing outside the U.S. are public pension funds and likely to be more 'activist' in corporate governance, they are increasingly likely to have a substantial impact on the corporate governance practices of foreign corporations," says The Conference Board report. This activism of these relatively large U.S. public pension funds may be even more striking since companies outside the U.S. tend to have smaller capitalizations.

(1) Data are calculated for The Conference Board's "traditional" group of
institutional investors -- pension funds, investment companies,
insurance companies, banks and foundations. The report does not
attempt to break out new classes of investors such as hedge and
private equity funds, because of a lack of concrete data and because
many of the traditional investor classes invest in hedge and equity
funds raising the possibility of double counting.

SOURCE The Conference Board
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