The stock market's speculative spark of the Sixties has evolved into this decade's sluggish conservation, analysts say, because of the dominance of the institutional traders and the disappearance of the small investor from the marketplace.
The concentration of pension investment holdings among a handful of the nation's banks, insurance companies and private funds has given phenomenal clout to pension managers. It also has narrowed the volume of trading in all but the strongest issues, shaped the future of many U.S. corporations and diverted what limited venture capital had been available from growing companies in need of nurturing to "safe," established issues deemed appropriate as prudent investments.
This view of the market is the consensus of many government and investment market sources, but it is hotly disputed by the leading pension fund institutions.
In hearings before the Senate Finance Committee Private Pension Plan Subcommittee this summer, pension experts testified that seven banks, six of them in New York, manage nearly one-fifth of the total U.S. pension fund assets.
The subcommittee chairman, Sen. Lloyd Bentsen (D-Tex.) is the sponsor of a bill pending before the committee that would limit to 5 per cent the amount of outstanding shares of any company that could be held by a single pension manager without incurring a tax penalty. The penalties are designed to encourage greater liquidity in the stock market and to foster investment in smaller, growing companies.
The bill would not affect institutional managers who already control more than 5 per cent of an issue's shares. At the same time, pension managers would have the option of investing up to 2 per cent of a plan's assets in new companies with less than $25 million in capitalization without being subject to the scrutiny of the Employee Retirement Income Security Act's stringent 'prudent man rule," which weighs the stability of pension investments.
The prudent man rule on investments has been cited by pension managers as a major reason for the investment choices and one of the primary causes of concentration of investments in established companies to the detriment of smaller corporations.
As Bentsen said during the hearings, "No one is going to being a suit against a manager because the stock of General Motors or IBM went down the tube, but they might if he had invested in Widget Corp."
An aide to the senator said Bentsen hopes to end the concentration of holdings which gives institutions enormous influence in the stock markets and on the nation's corporations.
"It'll come up for discussion when the Congress comes back from recess early next year," he said last week.
Among the bill's most vocal opponents, he said, are Sen. Daniel Moynihan (D-N.Y.), whose state is home to the leading institutional fund managera, as well as the banks, insurance companies and private fund specialists who trade the largest portfolios.
Morgan Guaranty Trust Co. alone sold $90 million of IBM stock each year for the past years, but still holds more than $1.5 billion worth of the shares - primarily in its pension portfolios, according to Georgetown University law professor Roy Schotland who testified before the subcommittee.
He told the committee that Morgan controls $15 billion in pension accounts along, holding well over 5 per cent of the outstanding shares of some of the nation's larges corporations, including those of another major bank, Manufacturers Hanover Trust Co. of New York.
Morgan held 5.37 per cent of Manufacturer's shares at the end of 1976 and accounts for 24 per cent of the purchases of the rival bank stock in 1974, Schotland said.
The pension assets of Morgan Guaranty - excluding $10 billion worth of shares in other trust and investment portfolios it manages - include more than 5 per cent of Goodyear Tire & Rubber Co., International Paper Co., Pepsico Inc., Armstrong Cork Co., Burlington Industries, Champion International Corp., Connecticut General Insurance, Crown Zellerbach Co., Heublein Inc., Louisiana Land Exploration Co., the Melville Corp., Pittston Co., Southern Railway Co., Squibb Corp., Sterling Drug Co. and UAL, Inc., the holding company for United Air Lines, according to a study on pension holdings Schotland completed last year.
He testified, "Morgan is merely the big tip of a concentrated iceberg. Although there are over 4,000 trust departments in America, seven of them - six of the seven are in New York - manage $63 billion, or 38 per cent, of all bank-managed pension assets. This is over 17 per cent of all pension assets in America, in the hands of seven banks."
He identified the seven as Morgan, Citibank, Bankers Trust, Chase Manhattan, U.S. Trust Co., Manufacturers Hanover and Pittsburgh's Mellon Bank.
Schotland called the concentration of holdings dangerous and said it poses unnecessary risks for pension beneficiaries, for the stock market, and for the companies where the pension accounts are invested in heavy proportions.
When such concentrated trading occurs, he noted in his study, it takes the major money managers a large amount of time to complete the transactions in an attempt to avoid distortion of the market price. He said, however, that prices are affected by large bloc sales and purchases and that drawn-out trading can cost pension accounts the very protection that diversified stock holdings are supposed to offer.
During the hearings, Bentsen said he agreed with the professor's assessment. He pointed out that the 15 biggest banks manage roughly 60 per cent of all pension trust accounts and 12 top insurance companies manage approximately 80 per cent of all insurance company-managed pension assets. He said they tend to concentrate their investments in approximately the same 200 to 300 securities.
In introducing his bill, the Pension Investment Act of 1977 last May, Bentsen said the potential for manipulation of the stock market by large institutions could result in "a very substantial reduction of stock prices . . . to the detriment of countless of American workers and retirees."
He added, "If one of this very small group of pension managers decides to sell a major investment on a bit of news and other managers attempt to follow, they find that the 'gate' suddenly gets very narrow."
Executives of Morgan Guaranty disputed the picture painted by Schotland of the power held by the institution. "We are not as big as we at first appear," one vice president said.
Executive vice president Harrison V. Smith told the subcommittee that at his bank, "Investments are made for investment reasons and not for control." He said he knew of no evidence that would contradict a 1971 Securities and Exchange Commission study which said, "institutional trading overall has not impaired price stability in markets."
A study prepared by Morgan Guaranty to counter the subcommittee findings, released in August, said large institutional investors have at most a "very small and infrequent" effect on stock prices through their trading activities.
David W. Miller, a statistic professor at the Columbia University Graduate School of Business who prepared the study for Morgan, disputed Schotland's study.
Miller, who followed bank trust transactions for nine quarters between 1975 and 1977, said possible trading effects on prices could be found in only two of the nine quarters and that these influences were "very small."