Imagine it is 2006, and a savvy and perspicacious Chief Investment Officer of a large pension fund foresees a looming threat to the stability in the financial markets. Having lost confidence in the banks, what can she do? Unlike hedge funds or active managers, she cannot short or even exit the shares of the financial sector because her fund is so large that it must hold every name in the public markets. Even if she could, she knows that the coming financial crisis will impose pain on every sector of her portfolio. When the financial crisis does arrive, the CIO may feel herself helpless to avoid the risk to her fund’s stability or her beneficiaries’ well-being.
Our hypothetical pension fund represents a class of investors known as “universal owners.” By its strictest definition, a universal owner is an institutional investor, usually a pension fund, endowment, foundation or sovereign wealth fund, with two distinguishing characteristics: it is large enough to own every company in the market, and it has long-term liabilities so that its investment time horizon stretches into decades. The defining characteristic of a universal owner is that they are exposed to the entire market, and have limited ability to control the investment performance of their equity portfolios through stock selection.
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John Wilson is the Head of Corporate Governance, Engagement & Research at Cornerstone Capital Inc. Prior to Cornerstone, he was the Director of Corporate Governance at TIAA-CREF and the Director of Socially Responsible Investing at the Christian Brothers Investment Services. He is also an Adjunct Assistant Professor at the Columbia University Graduate School of Business.