Growing pools of retirement and endowment funds seeking to invest on behalf of their constituents has led to the most important development in the investment world over the last 50 years: the rise of the institutional investor – corporate and government pension and investment funds, endowments and the like. Total assets under management have risen from approximately $100 billion in 1950 to $500 billion in 1970 to $2 trillion in 1980 to $6 trillion in 1990 to well over $10 trillion today. Institutional ownership of all publicly traded U.S. equity securities increased from approximately 10% to over 50%.
Unfortunately, most of this money is managed in a way detrimental to their constituents (the employees, retirees, universities and charities) and their investment performance. Hundreds of billions of dollars are routinely whipped from investment to investment based on little or no in-depth research or analysis. Institutional investors, and by extension the institutional money managers they hire, have fully engaged in groupthink – engaging in a monthly and quarterly performance derby, where the fees at stake to the winners and losers are very high. Not wanting to run the risk of falling behind the pack in the short term, most institutional money managers shoot for acceptable mediocrity. Acting against the crowd runs the risk of short-term underperformance – which in turn runs the risk of getting fired! It is the resulting short term, relative performance orientation that has made “institutional investor” an oxymoron.
For the thoughtful value investor, it is important to understand the institutional investment mentality for two reasons. First, because they dominate financial market trading and if you completely ignore them, you are likely to get trampled. Second, many investment opportunities exist because institutional investors exclude otherwise sound and logical investments from their universe, for no good reason at all. Picking up the elephant crumbs can be very rewarding.