Universal moaner

I feel like a heretic for saying this, but I am not a fan of the 'universal owner' concept, except in the very limited sense of helping people get interested in investor engagement. To recap the idea behind the universal owner theory is that big investors now own a major slice of the global economy. They might have exposure to all their own domestic market, plus a wide exposure overseas too. They own a bit of companies in all industries, and in many countries, and they gain further exposure through investment in assets like property.

What flows from this picture is the idea that such investors, or universal owners, have a financial self-interest in ensuring that companies do not externalise their costs. And the reason for this is that the universal owner may feel the impact elsewhere in their portfolio. Think about it - what happens at BP doesn't only affect your holdings directly in the company itself but also in suppliers, insurers and all sorts. So it really does make sense for universal owners to look at systemic risks, and encourage companies to be responsible.

Yeah, well, sort of. But there are numerous problems with this description. First up, I'm not sure how many investors actually fall into the category of universal owners. To give you a really simple example, just take a look at responses to the TUC Fund Manager Voting Survey. Although it surveys the UK's biggest companies, every year some of the respondents didn't hold some of the companies in respect of which voting decisions are sought. So even big investors in a big market like the UK don't have exposure to their entire domestic equity market. Surely the situation in overseas markets is likely to be even more like this - they seem unlikely to hold the whole market. And by the way, in the UK the biggest investors are asset managers, not asset owners like pension funds, so the potential for democratic control is... ahem... limited.

Second, what about the bits of the economy that universal owners don't have exposure to. There is actually quite a bit of it. To make a trivial point, you won't have exposure to Waitrose unless you're an employee! But what about companies that aren't publicly listed, partnerships, mutuals, publicly-owned banks etc. It's not an unimportant proportion of the economy.

Thirdly, the theory effectively inverts the rationale behind diversification in the first place. The whole idea of holding the entire market, and spreading your assets globally, is that it spreads your risk. So actually you can even handle a BP crisis without it doing too much damage. Now you can make a valid argument that in reality diversification has limited benefits, and that these reduce pretty quickly once you get past a relatively small number of holdings. But that's not the same as saying that you can't handle a few dogs in a global portfolio.

Set against this, I do think the concept is useful as a way of getting people to think about the extent of large investors' economic exposure, which I think can be quite empowering. In addition, the basic model can appear to give those who need it the cover to make arguments in favour of a more engaged approach to their investments. I think it's this latter point that bothers me most of all. In a sense a flawed theory is being used to encourage people to adopt a certain stance (more responsible investment). It's a pseudo business case if you like.

And I think where I've got to after almost 10 years at this stuff is that it might just be better for some investors to take certain positions because they think they are the right positions to take. Often it's ultimately a political decision, and I think we (those of us who are interested in the politics of ownership) are better off being open about this than always searching for reasons why it's ultimately in our financial self-interest to do the right thing.