1、Lecture 16: Institutional Investing,Migration of Capital:Main Street to Wall Street,Trend over decades has been to greater institutional investing, and volume of trade on stock market now dominated by it. Increasing tendency for institutions to participate in corporate governance, solving the contro

2、l problem referred to by Berle and Means. An epic shift of power in our society towards Wall Street.,Financial Assets of US Households 2000-III in $Billions,Pension funds $10348 Corporate equities $7447 Equity in noncorporate business $4848 Deposits $4456 Mutual funds $3274 Personal trusts $1124 Lif

3、e insurance $821 Corporate & foreign bonds & other $2887 Total $35205,Private Pension Funds Assets2000-III in $Billions,Corporate equities $2451 Mutual fund shares $918 Assets held at insurance companies (GICs, variable annuities etc.) $506 US Government securities $457 Corp & foreign bonds $287 Oth

4、er $511 Total $5129,State & Local Employees Retirement Funds 2000-III in $B,Corporate equities $1953 US government securities $383 Corporate & foreign bonds $324 Other $324 Total $3054,Commercial BanksAssets 2000-III in $billions,Loans $3803 US Government Securities $913 Vault cash $35 Reserves at F

5、ederal Reserve $17 Corporate equities $12 Other Total $6344,S&Ls & Savings Banks Assets 2000-III in $billions,Mortgages $722 US Government securities $148 Equities $24 Reserves at Federal Reserve $1 Other $308 Total $1203,Credit Unions Assets2000-III in $billions,Consumer credit $181 Home mortgages

6、$125 US Government securities $75 Other $54 Total $435,Mutual Funds,Corporate equities $3622 US Government securities $393 Corporate & foreign bonds $368 Municipal securities $228 Other $205 Total $4816,Mutual Fund History,In 1920s, many investment companies bilked small investors Massachusetts Inve

7、stment Trust (MIT) in 1920s had only one class of investors, published portfolio, redeemed on demand Became model for mutual fund industry Investment Company Institute,Structure of Mutual Fund,Assets of mutual fund are held in common Purchases and redemptions are made at prices as of 4pm market clos

8、e on that day Other peoples purchases and redemptions affect you,Recent Mutual Fund Scandals,Late trading: mutual funds accept orders at 4pm prices even though orders were made after 4pm Market timing: mutual fund investors wait until almost 4pm to buy in or redeem their shares in foreign funds, suc

9、h as Japan fund.,ETFs vs. Mutual Funds,First Exchange Trade Fund: Standard & Poors Depositary Receipts (SPDRs, Spiders), AMEX 1993 SPDRs hold portfolio of S&P index Management fee: 12 basis points Automatic creation and redemption QQQs, I-Shares Macro securities are analogous to ETFs, but are based

10、on an index. (AMEX). Macro Securities Research LLC, Macro Financial LLC,Bank Personal Trusts & EstatesAssets 2000-III in $Billions,Mutual funds $418 Corporate Equities $358 US Government securities $67 Money Market $56 Other $198 Total $1097,Trusts Not Always Institutional,Common law countries allow

11、 individuals to appoint friends as trustees. Spendthrift trust increasingly common form of inheritance. Planning for divorces decades hence.,Life Insurance Companies Assets 2000-III $Billions,Credit market instruments (bonds, corp & govt, mortgages, policy loans) $1928 Corporate equities $1028 Other

12、 $44 Total $3000,Rest of World Assets in US2000-III in $Billions,US Government securities $1703 US corporate equities $1691 Foreign & direct investments $1310 US Corporate bonds $953 Other $1320 Total $6977,Pension Funds,First pension funds in world: late 19th Century. Retirement was not invented un

13、til then. Increase in life expectancy in 20th Century brought large numbers of elderly people for first time in human history.,Milestones in US Pension History,1875 American Express Co. (then a shipping co.) establishes first US corporate pension plan: for employees who worked there 20 years, passed

14、 age 60, and were disabled, 50% of average of last ten years pay. Few employees qualified.,Carnegie Steel Pension 1901,First large industrial pension fund Andrew Carnegie: The Gospel of Wealth, Carnegie Institute of Technology, Carnegie Endowment for Peace By 1929, 329 industrial firms had pension p

15、lans, and these covered 10% of labor force. Pension benefits were not a contractual right.,Union Pension Funds,Patternmakers 1900 Granitecutters & Cigarmakers 1905 Locomotive Engineers 1912 was first to to grant contractual right to pension,Collapse of Pensions after 1929,Plans almost all unfunded,

16、benefits paid out of profits now nonexistent. With Great Depression, benefits were cut sharply. Those funded were often invested in company stock. Union plans failed disastrously, leading to their near extinction Failures were impetus to Social Security Act of 1935.,Why Were Early Pension Plans So B

17、adly Designed?,Pension benefits not yet perceived as a right or standard Plans were viewed as incentive for long-term company loyalty, which few achieved. Reflects general slowness for financial innovation.,General Motors Pension Plan 1950,In labor negotiations, GM Chairman Charles Wilson proposed f

18、ully funded plan managed by financial professionals. Proposed investing in the stock market, rather than fixed incomes, but no more than 5% in any one stock. Diversification. Wilson made stunning proposal that funding not be invested in GM stock.,Studebaker Pension Default, 1963,UAW accused of acqui

19、escing in underfunding of pension plan so that it could obtain a false “victory” in prior negotiations with management. After default, UAW negotiated full benefits for senior workers, little or nothing for others. Scandal led to Employee Retirement Income Security Act (ERISA) 1974.,Employment Retire

20、ment Income Security Act (ERISA) 1974,Act was in response to abuses in earlier defined benefit pensions Prohibits pay-as-you-go pension plans, defined benefit plans must be fully funded. Funds must be adequate:sound actuarial principles. Created Pension Benefits Guarantee Corp. Prudent person standa

21、rd for managers Minimum vesting standards. An employee for ten years has complete vesting,Prudent Person Rule,ERISA: Investments must be made with “the care, skill prudence and diligence under the circumstances then prevailing that a prudent man acting in a like capacity and familiar with such matte

22、rs would use in the conduct of an enterprise of a like character and with like aims.”,Problems with Prudent Person Rule,Legislates conventional wisdom. Decisions cannot be based on individual judgment.,Pension Funds Types,Defined Benefit: Traditional, old-line manufacturing, supported by labor union

23、s. Now in decline. Not usually indexed. Defined Contribution: Employee contributes to own account. 401(k) plans begun in 1981 in US. In defined contribution, individuals choose allocations across broad asset classes.,OBarr & Conley Study,OBarr & Conley (Fortune & Folly, 1992) “questions about pensio

24、n strategy elicited lengthy narratives about such cultural issues as history, politics, and relationships, but little talk about economics or finance.” (p. 75) Fund executives “rarely rise above their personal perspectives to articulate a corporate vision.” “too busy living through an event to stop

25、and analyze it.” (p. 76),OBarr & Conley Cont.,Creation myths prominent. The great founder Displacing responsibility. Outside managers used to shift possible blame. Blaming the law,Nonprofit Organizations,Non distribution constraint. Effectively, there are no owners. Tax exempt. Board of trustees app

26、oints own successors. 900,000 tax-exempt nonprofits in the US 120,000 non-profit charities in the UK Many other countries Nonprofits contribute 4% of US national income,Economics of Nonprofits,Donations are usually only a minor source of income. Nonprofit hospitals compete alongside for-profit hospi

27、tals, look similar.,Endowments and Foundations,Not completely tax free Grantmaking foundations must give away 5% of wealth each year, or else lose tax-exempt status. (Does not apply to operating foundations.) Two-tier excise tax on income, 1% if they maintain or increase giving, 2% otherwise.,Fragility & Importance of University Endowments,Yale University and Eagle Bank 1825 Yale lost virtually its entire endowment in this bank. Boston University John Silber and Seragen $90 million in one company, lost 90%. University of Bridgeport & Reverend Sung Myung Moon Uni