Historical Fluctuations Of Common Stocks And Pension Funds

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The decade of the 1950s is aptly described as the decade of common stocks. For many years, trustees could not invest in common stocks unless specifically authorized to do so.

Gradually, many states adopted the so-called prudent man rule, which gave trustees greater latitude and permitted them to invest not only in bonds but also in common stocks that met certain tests. In 1951, New York State life insurance companies were permitted to make limited investments in common stocks, a practice which had been beyond the pale since the insurance scandals in the early years of this century. In 1952, mutual savings banks were granted similar authority. In fact, such banks were authorized to organize an investment company. Institutional Shareholders Mutual Fund, Incorporated, which invests in common stocks, is owned by New York State mutual savings banks.

Besides changes in the law, the long-term record of common stocks and the inflationary tendencies prevailing during the 1950s induced managers of college endowment funds and pension funds to invest in common stocks. A step that gained wide attention was taken in 1952, when the Teachers Insurance and Annuity Association formed the College Retirement Equities Fund and introduced the first variable annuity contract involving common stock investment. Common trust funds, administering small individual trusts through a cooperative pooling of the assets of the smaller trusts, were established. They have invested a substantial part of these funds in common stocks. Such developments influenced the investment practice of individuals and undoubtedly had a profound effect on the growth of investment companies, particularly open-end funds.

It has been estimated that the value of stock holdings of financial intermediaries increased from approximately $18 billion in 1949 to almost $29 billion in 1949 and rose to about $84 billion in 1956. Securities and Exchange Commission estimates of net purchases of common and preferred stocks made by financial institutions set the amount at approximately $1 billion in 1951 and $3.4 billion in 1960.

Pension funds and investment company purchases have shown by far the most rapid increase, more particularly in recent years. Life insurance companies have been adding to their holdings at the rate of only about $100 million annually, and have been in no hurry to reach legal maximums. Investment in equities by fire, marine, and casualty companies has been at the rate of about $200 million annually. Savings banks are adding to their stock portfolios at about the same rate as life insurance companies, a somewhat unexpected situation.

Corporate pension funds in all likelihood will continue to be the largest institutional purchasers of common stocks, both because of the growth of funds available and of the conviction that a sizable part of the funds should be invested in common stocks. At the end of 1960, corporate pension funds in the United States had assets of $28.7 billion, and the average rate of growth recently has been almost $3 billion annually. As lately as 1954, assets were only $12 billion. In 1960, 50 percent of the net receipts of all pension funds were invested in common stocks, substantially more than in any previous year except 1959.

As of Dec. 31, 1960, one-third of pension fund assets was invested in common and preferred stock; but based on market value, such investments comprised almost 45 percent of the value of fund assets. Two decades ago—even had pension funds attained a magnitude approaching their present size-only a small fraction of the total would have been in common stocks.

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