Page 96 - Crisis Communication Practical PR Strategies

7
The New Dynamics of Financial Crisis 77
7
Institutional investors: potential agents

of crisis

The other important new dynamic of financial crisis relates to changes
in a critical audience segment for the public company: the institutional
shareholder.
The institutional universe has exploded in terms of size in the past
20 years. The number of institutions investing in equities has more
than tripled since the late 1980s. Growth in funds under management
has been even more dramatic, expanding more than 15-fold in that
time. Hedge funds, the more shadowy part of the institutional market,
have grown even more dramatically: by some estimates there are about
8,000 hedge funds today with combined assets of about US $1 trillion,
up from US $400 billion in 2001. Because hedge funds can leverage,
their impact on the markets is probably far larger.
Not only has the institutional market grown, but also its behaviour
has changed in ways that have important crisis implications. Experts
talk about the evolution of pension funds from owners to agents.
While we are now seeing something of a counter-trend, pension funds
have largely outsourced day-to-day portfolio management to third-
party asset managers. Pension funds increasingly act like a fund of
funds manager regarding the actively managed portion of their port-
folio, overseeing advisers rather than assets. The market has become
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even more intensely returns-driven, where poor performing asset
managers can be easily replaced, where sophisticated performance
monitoring technology is widely employed, and where the under-
funding crisis has fostered a ‘beat the market’ mentality at most
pension funds in the United States.
How do all these trends influence the crisis calculus? First, it makes
the entire institutional investment arena even more focused on the
short term. As one asset manager recently put it, ‘As long as client man-
dates (eg, pension funds) require us to deliver performance bench-
marked against short-term market tracker indexes, we will of course
remain short term in our outlook.’ It is estimated that the average
stock mutual fund today turns over its complete portfolio every year.
One might think that a quarter-to-quarter focus could make institu-
tional shareholders less interested in the business fundamentals of
their underlying investment. But in many cases precisely the opposite
has occurred: institutional investors have moved from passive
observers of management to, when circumstances warrant, active
agents of strategic restructuring to build shareholder value.