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July 01, 2003
Pension Funds and Mutual Funds Influence Their Holdings Differently
    by William Baue

Academic studies discern between how pension funds and mutual funds wield influence as institutional shareowners, but the studies lack methods sophisticated enough to evaluate the effects of SRI.

Are all institutional investors alike in terms of their influence on how companies are managed? No, according to three articles on the subject published in the last few years in the Academy of Management Journal (AMJ). AMJ is a peer-reviewed academic periodical on corporate management published every other month by Pace University.

The latest study, published in the April-May 2003 issue of AMJ, focuses on the internationalization, or corporate expansion into the global marketplace, of 197 S&P 1500 firms, based on data collected in 1996. The researchers found that pension and mutual funds favored internationalization for significantly different reasons: whereas mutual funds support internationalization for short-term profits, pension funds favor it for long-term stability, especially in high-tech industries.

"Institutional investors are, emphatically, not all alike," said University of Oklahoma Professor Robert E. Hoskisson, a co-author of the study. "Our research reveals clearly that public pension funds approach investing with a longer time horizon than that of professional investment funds, such as mutual funds and investment banks."

"In general, public pension funds are much more likely than mutual funds or investment banks to support the heavy lifting that drives long-term progress not just for an individual company but for the greater society," added Professor Laszlo Tihanyi, a University of Oklahoma colleague who co-authored the study. There were two other co-authors, University of Oklahoma Professor Richard A. Johnson and Arizona State University Professor Michael A.Hitt.

The paper considered internationalization as a desirable development in general, as it correlates positively with firm performance and risk-adjusted returns. The study also mentioned several negative consequences of internationalization.

Interestingly, the study did not list any social or environmental impacts amongst the negative implications. Professors Tihanyi and Hoskisson told that it is very difficult to isolate and measure social and environmental considerations in academic studies, so they did not include these variables in their parameters.

Another study, published in the August-September 2002 issue of AMJ, found that pension funds favor internal innovation through R&D, while mutual funds prefer external innovation through business acquisitions. Based on the survey of 234 companies between 1985 and 1991, the study also found that both pension and mutual funds prefer firms that have independent board members who own company stock. It also found, though, that pension funds tend to give more support than mutual funds to "inside" board members who own company stock.

Where do SRI mutual funds fit into this equation? Certainly not lumped directly with mainstream mutual funds, Prof. Hoskisson admitted to, as SRI fund managers tend to have a much longer horizon than most mutual funds. In this sense, SRI funds align closer to pension funds. However, neither of these papers discerned SRI funds from the overall universe of mutual funds studied, though both Prof. Hoskisson and Prof. Tihanyi told that such a distinction sounded like a promising research question.

The trick with such research is tracking social issues, according to co-author Prof. Richard Johnson. He also co-wrote a 1999 AMJ article that used the same approach to study the influence of these two types of institutional investors on corporate social performance (CSP).

Prof. Johnson separated five dimensions of CSP tracked by KLD Research & Analytics into two groups. He combined "product quality" and "environment" into a single "product quality" group, and "community," "women and minorities," and "employee relations" into a "people" group.

The study, which examined 1993 data on 252 companies, found a relationship existed between pension funds and CSP, but no found such relationship existed for mutual funds. It also found that the product quality dimension of CSP was linked to companies where top management owned equity in the company. No such link was found for the people dimension.

Prof. Johnson told that objective standards such as ISO 14000 certification make it possible for academic researchers to isolate environmental and product quality dimensions. However, Prof. Johnson knows of no such objective standards for isolating social dimensions, a deficiency that hampers academic research on socially responsible investing.


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