Big PictureSMSF Strategies
How the big institutional investors have taken over the stock market
23 Mar 2022
3 month(s) ago
A report by a Federal government committee into common (institutional) ownership in the stock market is revealing. It is shaping the future of the nation's financial system.
To understand how stock markets work it is necessary to start with what are called the institutional investors: super funds, global fund managers and insurance companies. It is they who weild the really large swathes of capital and it is they who move the markets.
A parliamentary committee has released a report that looks at institutional ownership in the stock market (called common ownership). Called the Report on the implications of common ownership and capital concentration in Australia it has some interesting data on trends at the institutional level. For SMSF owners – SMSFs are the opposite of common ownership, they are individual ownership – this who is they are investing alongside.
“The increase in institutional ownership of Australian listed companies has
been driven by changes in how individuals and businesses invest in publicly
listed companies. Over the past three decades, the Australian Parliament has
directed money from households into compulsory superannuation
“This had enabled large pools of money to be managed by few
people. The diversification strategies of these funds mean that they tend to
own large swathes of an entire market across a number of firms. Further,
when combined with the number of retail investors, some of the funds, if
they were to coordinate their actions, would have effective control over
some very large Australian companies.”
The report says at June 2021, APRA-regulated superannuation funds’ holdings of listed equities represented approximately 20% of the market capitalisation of all ASX listed companies.
“In the superannuation sector, the increase in the concentration of ownership
of listed companies has been further driven in recent years by funds shifting
to managing more of their investment ‘in house,’ as opposed to outsourcing
that function to other investment managers. Equally influential has been the
drive towards mergers of superannuation funds, with the aim of ensuring
that they have sufficient scale to compete.”
The report says the increasingly concentrated ownership of listed equities is likely to lead to “greater potential for the simultaneous ownership of shares in competing
companies by institutional investors.” This is inevitable, of course, because institutional investors diversify their holdings. It could become a problem in that it may encourage collusion between competitors, but this should be preventable through the usual legal constraints.
The report also sees massive growth in passive, or index, funds, and the activity of global institutional capital.
“Over this period, passively managed funds (such as index and superannuation funds) have exhibited particularly strong growth. According to the ACCC, the collective ownership interest of three major foreign-owned fund managers—Vanguard, BlackRock and State Street—was estimated to have represented 14 per cent of the issued capital of ASX200 companies in 2019.”
The growth of super has been rapid. The growth of SMSFs has also been fast, with funds under management approaching $1 trillion:
“In the superannuation sector, the value of Australian listed equities owned by superannuation funds that are regulated by the Australian Prudential Regulatory Authority (APRA) grew by 50 per cent between September 2012 and March 2021. The value of Australian listed equities owned by those funds in March 2021 was $467 billion.
“Furthermore, the superannuation industry in Australia is projected to
continue to grow substantially. Treasury informed the committee that, as at
30 June 2021, the superannuation system had assets under management
valued at around 160 per cent of GDP. This value is projected to grow to
around 244 per cent of GDP by 30 June 2061.”
The size of this accumulation of Australian institutional capital is rarely fully appreciated. It will create a financial system in this country that is unlike any other. Most of the rest of the world will struggle with unfunded pension liabilities but that will not happen here because each superannuant owns their own super money.
Reader note: This is general reporting only and should not be considered in any way to be investment or tax advice. It does not take into consideration the investment objectives, financial situation or particular needs of any particular investor. For more information please read our disclosure statement.