Who are the investors?

By Dariush Sokolov | Corporate Watch Magazine # 54 | Summer 2013

According to the official history book in George Orwell's 1984, in the old days capitalists were “fat, ugly men with wicked faces”, dressed in frock coats and top hats. “They owned everything in the world, and everyone else was their slave. They owned all the land, all the houses, all the factories, and all the money. If anyone disobeyed them they could throw them into prison, or they could take his job away and starve him to death.” Are there still capitalists in the 21st century? And if so, what do they look like?

One line you may hear from defenders of the system these days is that we're all capitalists now. Economic power, according to this story, is ultimately in the hands of investors who decide where to allocate resources by assessing the prospects of companies, governments and other institutions and buying their shares and bonds. And investors are just people like you and me: savers, pensioners, everyday folk planning for our everyday petrol-powered futures.

I do think there is a grain of truth in this picture: in some respects, we all help keep the wheels of capital turning, and economic power did become more decentralised in the mid-20th century. But some people are much more powerful, and more responsible for capitalism's trajectory, than others.

Exploring capital

I will start with a few rough definitions. A capitalist, we might suppose, is someone who owns capital. And roughly speaking, capital is stuff that can be used to produce more stuff – for example, machines, raw materials or any commodities that can be stuck into production processes and used to create new commodities. These definitions already throw up lots of complex questions: is capital just physical stuff? What about ideas, or say words, brand names, so-called 'intellectual capital'? What about the neoliberal economists' claim that human labour is really 'human capital'? Or the sociologists' idea of 'social capital'? And if ideas and words can be capitalised, then what about sounds, sights, smells, feelings?

Whatever forms of capital there are, one thing they share is that they can be owned, bought and sold – that is, they are 'commodities'. But there are more complexities here, too. For one thing, the people who have the most power over how capital is allocated, used and controlled, are often not those who technically own it. For example, executives, fund managers, traders, investment bank 'arrangers', lawyers and other fixers and middlemen may have more power over resources than their legal owners.

With all these caveats, we might make a distinction between productive capital (actual resources that go into production processes) and finance capital. An actual machine, a ton of coal, a field of soya, and perhaps the patent on a genetically modified strain of soya beans, is productive capital. Finance capital, on the other hand, includes things like shares, bonds and money.

Originally, a share certificate was a piece of paper confirming that you owned half of the soya field, and a bond was a piece of paper saying that the owners of the field owed you a debt that they would pay you back with interest over a number of years. But the existence of pieces of paper, or pieces of gold, was never really the point. Financial instruments are agreements or contracts. They need to be recorded and represented somehow, but that could be on paper or electronically, or even just in human memory. Thus, productive capital is the actual stuff that can be used to make more stuff, while finance capital is contractual agreements that give you legally enforceable rights over productive capital, whether now or in the future.

Machines, fields, tons of beans, litres of soya milk, as well as shares and bonds, are all bought and sold in markets. The markets where financial transactions take place are called financial markets. They might be real physical places, like the London or New York stock exchanges in the old days or, more commonly now, virtual trading floors where deals are made on computer networks across the world. In any case, financial markets allow capital to move rapidly, flexibly, and to also lose its traces. For example, a mortgage (a loan agreement on a real, physical building somewhere) can be sold, resold, pooled with other mortgages, securitised into a mortgage-backed bond (a promise to pay back interest to new investors as the mortgages in the original pool pay back theirs), and made into a reference asset for derivatives contracts (such as bets on whether the mortgages will ever be paid back at all). And these new bonds and derivatives can themselves be sold, resold, pooled and so on, ad infinitum. The physical capital, the building, stays put; but the financial capital associated with it is transformed and traded around the globe. So who owns the original building now?

Some of these transactions are done in big marketplaces that are regulated and relatively transparent. For example, companies that 'publicly list' their shares on major stock exchanges are bound by reporting rules that make their activities and ownership more easy to follow. But we should not forget that many transactions take place much less visibly. For example, even many big corporations are still owned by family members and associates, who trade their shares privately, behind the scenes. In fact, there has been a trend of increasing privacy: private equity funds are funds that specialise in buying companies in deals away from the public stock markets. At the same time, in the recent decades of deregulation and 'financial innovation' (that is, bankers inventing ever more complex kinds of bonds, derivatives and other securities), many financial instruments have become less standardised and are typically sold in confidential, 'bespoke' deals which are near-impossible to trace. All this should be borne in mind when we look at some figures in a minute.

According to economic theory, owners look to invest their financial capital (that is, they ultimately want to put the productive capital it represents to work in production processes) where they expect it will be most profitable. In reality, things are more complicated, as capitalists are also a kind of human lifeform and therefore act on habits, fears, instincts, affinities and so on. In any case, capitalist systems have developed a number of institutions for pooling capital, thereby concentrating investment decisions into the hands of specialist investment managers.

The institutions

Banks are one of these institutions. Millions of companies and individuals deposit money with banks; banks pool these deposits together and re-invest them by, (among other things, making loans to more individuals, companies, states and others. According to a 2012 report by research and lobby group TheCityUK, the assets of the world's largest 1,000 banks total $101.6 trillion. To put this into perspective, total world GDP (the money value of all state-measured stuff produced on the planet during that year) was around $65 trillion. To break it down regionally, US banks control 13.3% of total bank assets, followed by the UK – a global banking 'hub' – with 11.7%, then Japan and China with around 10% each, followed by other European centres. China's share is increasing rapidly. Bank assets include the loans they make to individuals and companies, their holdings of government and other bonds, and any other investments they make.

Other major investment institutions include corporations, states and investment funds. All of these, in different ways, take in finance capital from numerous individuals and direct it to particular projects. I will look in a bit more detail at investment funds here.

An investment fund is a legal structure in which a number of owners pool their financial capital together under the direction of a professional 'fund manager'. Funds usually have some basic targets and criteria, such as ones about risk levels or specific industries or regions to invest in. But within these guidelines decisions are made by the fund managers. The figures below give a crude snapshot of global 'funds under management'. There are no standard figures on global investment: these 2012 figures are estimates, or maybe guesstimates, by TheCityUK. I have no idea how accurate they are. Note, however, that this sector, taken together, is bigger than the banks. And the figures do not account for other major capitalist investors such as states and corporates, or many other less visible and measurable pools of capital. Nonetheless, we can use them to bring out some interesting trends.

	$ Trillion
Private wealth	42
Pension Funds	31.5
Insurance Companies	24
Mutual Funds	23.8
Sovereign Wealth Funds	4.8
Private Equity	2.2
Hedge Funds	1.9

The biggest class of investment funds are 'private wealth funds'.

Pension funds, mutual funds and insurance funds are often classed together as 'conventional asset managers'. These are usually the biggest investment funds: some are bigger than large countries. Here are the top 10 in the 2009 Pensions & Investment 500 survey. The amounts are their 'assets under management' (AuM).

	$ tr
BlackRock	3.35
State Street Global	1.91
Allianz Group	1.86
Fidelity Investments	1.7
Vanguard Group	1.51
AXA Group	1.45
BNP Paribas	1.33
Deutsche Bank	1.26
JP Morgan Chase	1.25
Capital Group	1.18

Despite their differences, these funds have a few important features in common. First, they pool together lots of separate capitals of many small investors: pension and insurance contributions or savings put into mutual funds. So, where 'private wealth' funds manage assets of the global rich, these funds manage the capital of the middle classes and better-off working classes, based overwhelmingly in the so-called first world. Secondly, as any individual investor is only a very small part of any such fund, it is fair to say that the balance of power in these funds sits very much with managers rather than the owners. However, the managers of these funds are often strongly regulated and bound by particularly tight investment guidelines. Pension funds, in particular, are usually allowed by law to invest only in the safest (highest rated) assets.

Private equity funds and hedge funds are the prime scapegoats of lots of the recent (liberal) rhetoric about the financial crisis. Both are less regulated and operate less publicly; they take bigger risks and aim to make bigger relative profits. Hedge funds are funds that follow 'non-traditional' investment strategies, often involving complicated mathematical risk models. Perhaps the most famous example was Long Term Capital Management (LTCM), a hedge fund with a board featuring Nobel prize-winning economists that went spectacularly bust in 1998. Despite the name, hedge funds do not necessarily have anything to do with 'hedging', or making protective investments to cover risks (as in hedging your bets). And like private equity funds, they had a recent rise in the recent boom era of deregulation, derivatives and financial innovations'. However, as the figures show, they are still small players in the overall scheme of things.

Also relatively small, but growing rapidly from almost zero a few years ago, are 'sovereign wealth funds'. This is a symptom of contemporary global shifts in economic power. There are two main kinds of 'developing' or resurgent economic power centres: China and other Asian manufacturers, and big commodities producers such as the Gulf states, Brazil and Russia (over 56% of the total in these figures comes from commodities exports, especially oil. Both types produce more income than the impoverished local populations, and even the elites, can consume. In addition, economies in these regions tend to be more centralised, controlled by states and state-connected plutocratic elites. Such states therefore have large concentrations of capital to invest abroad. Sovereign wealth funds are specific funds set up by rich states abound with cash for this purpose – although, according to TheCityUk, the trend is bigger than these numbers show: “There was also an additional $7.2 trillion held in other sovereign investment vehicles, such as pension reserve funds and development funds.” Many of these state funds are based in London.

Are we all investors now?

So who are the capitalists? What I have outlined above was just a snapshot of some of the more visibleconcentrations of capital ownership. Even there, capitalists come in many shapes and sizes. The global super-rich are important; indeed, the numbers above probably downplay their role – we have not looked at corporate oligarchies or the many more opaque holdings of the elites. Middle class savers are also important and, in this sense, it is true that capital ownership has become widely diffused, involving and incorporating many – at least in the richer parts of the world – and giving millions a stake in the system. There is also now a global shift in capital ownership towards the so-called developing world. But this does not necessarily go together with further diffusion of ownership across class lines, as wealth and power in many of these economies remain highly concentrated. We should not forget that states are also important capitalists and are, in fact, becoming more so. Bankers, fund managers and other financial specialists are also key players, even where they do not technically own the capital they manage. In fact, ownership rights are really just one of the more obvious ways in which power is encoded and maintained in capitalism. A thorough analysis of capitalist systems has to look at all the many dimensions of power involved and try to map all the weak points and tensions.

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This BLOG  looks at pensions and their impact on what are called Public Private Partnerships or P3’s these are not really about private funding at all but about two streams of public funding, pensions and government with private capital a third partner.
We will also deal with other pension matters, such as Defined Contribution Plans (DC) vs Defined Benefit (DB) PLANS, the weakness in private plans, the need for pension reform in public pensions to have shareholder rights, directorships and ethical investment directives and policies. 
Finally taking the long view we will show how these funds are forms of evolving social capital that is dominating private capital as we evolve into socialization of capital. 
Click HERE to read more....