Despite the economic recession and tumults in the stock market, The Conference Board revealed today that all major categories of institutional investors (including pension funds, mutual funds, insurance companies, savings institutions and foundations) have remained fundamentally committed to the same investment policies they were adopting prior to the credit crunch.

The Conference Board Institutional Investment Report, which is released annually in the fall, is the most comprehensive analysis of the asset growth and portfolio composition of institutional investors operating in the United States. It documents the presence of different types of institutional investors in single asset classes, such as equity, debt securities, alternative instruments (including hedge funds) and foreign securities. The 2009 edition includes definitive data for 2008 and discusses trends that have emerged in the most recent months.

“For decades, institutional investors had been shifting their allocation preferences from fixed-income securities into equity,” said Matteo Tonello, associate director of corporate governance at The Conference Board and co-author of the publication. “Then last year came, and it had a devastating effect on institutions’ expanded equity portfolios.” By the end of 2008, institutions had only 36.6 percent of their assets in equities, down from 47.2 percent at the end of 2007. “And yet these revisions appear to have been driven by market declines rather than by changes in investment policies,” Tonello concluded.

GENERAL FINDINGS ON INSTITUTIONAL INVESTMENT IN U.S. FINANCIAL MARKETS

Losses in 2008 alone erased years of steady growth
At the end of 2008, when measured as a percentage of outstanding U.S. financial assets, institutional assets had reached their lowest level since 1980, or 15.8 percent. The industry reported substantial losses across virtually all asset classes, with total institutional assets plunging 21.3 percent to $22,251.7 billion, a level similar to what was recorded in 2004.

Capital withdrawals hit investment companies
Mutual funds and other investment companies, which had seen the fastest growth in the last few decades, were hit the hardest by the recent market decline and capital withdrawals, with outflows totaling $2,503.5 billion for the year, or 30.7 percent of their 2007 asset value. By comparison, pension funds lost 24.1 percent of their 2007 asset value whereas insurance companies experienced a 7.8 percent contraction.

The recession did not alter the institutional landscape
Declines in capitalization occurred fairly evenly across the institutional investor spectrum, without significant changes to the share of total institutional assets held by type of institution. Today, pension funds were still the leading category, holding 38.6 percent of total institutional assets.

INSTITUTIONAL INVESTMENT IN EQUITY MARKETS

Market declines balanced mutual fund portfolios
Over the decades, mutual funds have grown into the investor category with the highest exposure to equity. At the close of 2008, as a result of stock market correction and the 45 percent median loss suffered by their equity portfolios, mutual funds were reporting much more balanced asset allocations.

Insurance companies were the least affected by plunging stock values
Insurance companies have lower exposure to stock and, not surprisingly, their asset allocation was the least affected by the market plunge. The property/casualty segment, in particular, reported asset distributions substantially identical to those of prior years, when investments in equities were never increased to the level that preceded the U.S. recession of 2001-2002.

Stock market declines did not substantially alter institutional ownership concentration in the largest 1,000 U.S. corporations
Over the last twenty years, institutional investors have steadily expanded their presence in the stock ledger of the largest 1,000 corporations. Despite the significant repercussions of the recent market declines on their equity portfolio, institutions still own a large majority of top American businesses.

INSTITUTIONAL INVESTMENT IN BOND MARKETS

Bond portfolio of institutions retained its aggregate value
At the end of 2008, when measured as a percentage of outstanding U.S. bonds, institutional bonds had reached their lowest level in the last decade, or 23.7 percent. By comparison, at the end of the 2001-2002 recession, institutions were still holding as much as 27 percent of total outstanding equities. However, by the end of 2008, the total market value of the fixed-income portfolio of institutional investors was substantially unchanged from the prior year. As previously mentioned, variations in bond allocations registered for some categories (e.g., open-end investment companies, for which bond investments went from 28.1 percent of the aggregate market value of their portfolio in 2007 to 41.9 percent in 2008; and pension funds, for which bond investments went from 19.3 percent in 2007 to 25.8 percent in 2008) were driven by the decline of the stock market rather than changes in investment policies.

INSTITUTIONAL INVESTMENT IN ALTERNATIVE INSTRUMENTS

Institutions remain committed to alternative investment allocations
Overall, despite the recent correction, institutional investors remain committed to alternative investment strategies. The large asset manager foray into hedge funds appears to be the result of a number of factors, including the need to pursue higher returns and reduce volatility to meet actuarial projections, and the competitiveness of traditional investment strategies in stocks and bonds. However, the value of alternative asset classes, which often lack public quotations, may not yet fully reflect the losses of the public market.

INSTITUTIONAL INVESTMENT IN FOREIGN SECURITIES

Mutual funds remain major players in foreign financial markets
Mutual funds remain major investors in non-U.S. securities, driven by the growing demand for diversification of household savings. In 2008, total assets held in foreign securities by the 25 pension funds with largest foreign allocations amounted to $206,920 million, compared to $210,320 million of total equities held by the 20 largest mutual funds focusing on international investment strategies.

Recent data show extraordinary institutional outflow from foreign markets
The dominance of mutual funds in foreign financial markets helps explain the severe contraction of investments in non-U.S. securities that was registered in 2008. At the end of the year, total equity held by the 20 largest actively managed funds operating in the international market was down 36.3 percent from the prior year.

The 2009 Institutional Investment Report avails itself of a variety of authoritative sources, including: the Board of Governors of the Federal Reserve System; the Investment Company Institute; the American Council of Life Insurance; the Council of Foundations; and the Employee Benefit Research Institute. It was co-authored by Stephan Rabimov, an economist currently serving on New York City Mayor Michael Bloomberg’s global initiative to reduce tobacco use in developing countries.

Source:
For purchasing information, please call The Conference Board Customer Service Department at (212) 339-0345.
The 2009 Institutional Investment Report: Trends in Asset Allocation and Portfolio Composition
The Conference Board, Report #1455 -09-RR