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Asset Allocation

After a Poor Decade, Institutional Investors Move Away From Equities

Studies show that large institutions are moving away from equities, burned by a decade of sub-par returns, but will such a move have caused them to miss one of the greatest bull runs in decades?

(August 20, 2009) – In response to poor equity returns over the past decade, large institutional investors from across the globe are cutting exposure to this staple asset class, data shows.


With stock returns lagging behind those of bonds by 8.6% since 1999 (according to a study by the London Business School and Credit Suisse), some – but clearly not all – institutional investors are cutting equity exposure. According to data from Bloomberg, four of the world’s seven largest pension funds have cut their equity exposure modestly, with the California Public Employees Retirement System (CalPERS) – a bellwether of American institutional investing – cutting holdings from 56% to 49%. Other large funds that made similar moves include Dutch-based ABP (from 32% to 29%) and the Korean National Pension (from 17% to 15%).

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British institutional investors have been particularly spooked by the poor performance of equities. According to data complied by Citigroup, equity holdings account for just 41% of British institutional portfolios, their lowest point since 1974. This figure exceeds bond holdings by just 1.6%, the smallest gap since 1962. The trend seems likely to continue: Up to 33% of UK pension funds plan on cutting equity exposure, according to a recent study by Watson Wyatt. Only 2% plan on increasing it.


The reason for this exodus? “The real issue is they don’t want the volatility they had,” Louise Kay, the head of UK institutional business development at Standard Life Investments told Bloomberg. “Funds normally have to look whether they rebalance or not after one asset class loses value, and this time they are wondering whether this is the right thing to do.”

Not everyone is running from the stock market, of course. The New York Common Fund is holding its allocation at 51%, while the government pensions of Norway and Japan – two massive capital pools – are holding steady on their equity exposure.


While moves out of poorly performing asset classes will rarely get managers fired, historical trends show that this past winter – namely, low price-to-earnings rations on many global stocks – might not have been the most opportune time to exit the market. While hindsight is always 20/20, investors who fled the stock market will have missed a bull run of proportions unseen since the 1930s.



To contact the <em>aiCIO</em> editor of this story: Kristopher McDaniel at <a href='mailto:kmcdaniel@assetinternational.com'>kmcdaniel@assetinternational.com</a>
Home > News > Regulation > Offered More Votes, Institutions Reject UK Shareholder Proposals
Regulation

Offered More Votes, Institutions Reject UK Shareholder Proposals

Institutions, despite being offered greater voting power in recent London proposals, are balking at a two-tiered shareholder system.

 

(August 20, 2009) – Some of the world’s largest investors and their advocates are speaking out against a proposal in London that would see long-term shareholders hold more voting rights than their short-term brethren.

 


Multiple European-based institutional investors and industry groups – including Norway’s sovereign wealth fund and the Association of British Insurers (ABI) – have voiced disapproval at United Kingdom City Minister Paul Myners’ two-tiered voting proposal. The proposed system would see long-term shareholders possess greater power in voting than short-term investors, a system reminiscent of the one used in France.

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“I don’t see how that could practically be implemented,“ said Yngve Slyngstad, chief executive of Norges Bank Investment Management – which controls the country’s oil fund and through it 1% of the London market — according to London’s Daily Telegraph. “One share, one vote is a good principle.” The ABI has echoed such concerns, adding that investors might be forced into holding shares for longer than would be prudent due to the proposed change.

 


Despite opposition, Myners has continued to advocate for novel ideas aimed at increasing shareholder oversight and involvement. “There is a lot of evidence to suggest that most institutions are uncomfortable with the responsibility of ownership, as opposed to investment,“ Myners noted in a recent BBC interview. “We need to do something to fix that, otherwise we have ownerless corporations.”

 


On top of awarding more votes to long-term shareholders, Myners has expressed interest in a shareholder exchange, where voting rights could be bought and sold. “Some shareholders who never vote could sell their voting rights to others who do want to vote,” he has said. “That would introduce some market discipline into voting. It would have to be limited — voting could not go beyond two votes per share, say. It is quite complicated, but it’s got merit.”

 


Both ideas have been attacked. Some advocates point out that one vote, one share was a victory for investors, as it wrested power away from vested interests such as controlling families. These proposals, they say, would be a step backwards. With regards to the buying and selling of voting rights, others note that some investors would have an interest in seeing a company do poorly, and thus have an incentive to buy shareholder voting rights with the aim of harming the company.



To contact the <em>aiCIO</em> editor of this story: Kristopher McDaniel at <a href='mailto:kmcdaniel@assetinternational.com'>kmcdaniel@assetinternational.com</a>

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