Chapter 1: The Ownership Revolution
It's Saturday morning; you and your partner head off to take care of a lengthy list of errands.
You start your morning by getting gas at a Petro-Canada service station. You might complain, again, about the high cost of gas and the profits of oil companies. But Ontario teachers might feel differently about those profits. Through their pension plan, they owned (on December 31, 2004), $134.8-million dollars worth of Petro-Canada shares. As owners, they get a share of those profits
Then, you were off to a Sobeys supermarket (Ontario teachers owned $146.1 million worth of Sobeys shares) where you got some groceries for dinner and to Safeway (Ontario teachers owned $68.7 million) where you bought some Maple Leaf ($639.6-million) luncheon meat.
After a stop at a Royal Bank ATM to get some cash (Ontario teachers own $321.3 million dollars worth of shares), you go shopping for a new DVD recorder and cell phone. You settle on a Hitachi DVD player (Ontario teachers owned $66.6 million dollars worth of Hitachi shares). And, your partner got a new Telus cellphone (Ontario teachers owned $97.3-million worth of Telus shares). Your partner was tempted by the BlackBerry phone from Research in Motion (Ontario teachers own $175.7-million worth of its shares), but decided it was more phone than needed.
Finally, you returned home, where you called WestJet to book a flight for a weekend holiday (to celebrate your 25th anniversary), and again Ontario teachers profit (with $224.0-million dollars worth of WestJet shares).
The Great Irony
Much of the 20th Century was spent battling, both literally and figuratively, over a set of ideas and practices called Communism
Central to that set of ideas was the premise that oppressed workers (the proletariat) would eventually become so poor and desperate they would rise up in revolution, violently overthrow the owners (the bourgeousie), and take over the factories, infrastructure,and capital ("the means of production"). As we all know, Communism failed and along with it the Marxist dream of revolution
But, in capitalist countries, workers have taken over the "means of production." Not by violent revolution, but as an unintended consequence of something quite the opposite: a desire to have a comfortable income in retirement
While we didn't have violent revolution, this change of ownership we're experiencing has had the same transformative effect as a revolution. Not only is it far-reaching, but also profound in the sense that it is altering the economic and social fabric of modern society
It's a historical turning point. We've seen not only the democratization of wealth, but also the emergence of a system in which working and middle class people methodically increase their wealth and power.
This was not a top-down revolution, as we would expect of a Marxist revolution (in practice, if not in theory). It was a bottom-up revolution, one that has steadily and stealthily grown since the end of World War II. Not that anyone was hiding it; rather that it's been so gradual, so incremental that it received little recognition. As Marshall McLuhan said, "We're not sure who discovered water, but we're pretty sure it wasn't fish."
The Observant
Among the first to identify this phenomenon was the eminent management writer and scholar Peter Drucker. He called it the Unseen Revolution, in a book by that name in 1973. When he updated and republished the book in 1996, he called it The Pension Fund Revolution, and gave the new edition that title
I prefer to call it The Ownership Revolution, since it includes not only pension funds, but also mutual funds and other financial vehicles. Other indirect investment vehicles include whole life insurance policies and Exchange Traded Funds (ETFs). And some of us, a minority, do invest directly by purchasing stocks, while others acquire stocks through employee stock ownership plans
Drucker recognized, as few of us did or have, that some new players were starting to dominate the investment world. They're called institutional investors; they buy and sell literally millions and billions worth of stocks every day on behalf of their members -- you and me
B.C. commentator Bill Bill Tielman recognized the phenomenon, from a labour perspective, in a 1999 opinion piece for The Financial Post:
"It's increasingly true that pension fund investment, like politics, makes for strange bedfellows.
"How else can you explain that when venture capitalists need heroes to ride to their rescue with bundles of cash, they depend on the brothers and sisters from the labour movement.
"Or that the biggest source of private-sector investment is public-sector workers' pension funds.
"Or that the second-largest pool of capital in Canada, following the big chartered banks, is the deferred earnings of four million unionized workers.
"Or that pension funds own a full 40% of the Toronto Stock Exchange's equity?" (Excerpted with permission from "Labour and the pension fund giant" The Financial Post, March 15, 1999)
And, FORTUNE spotted the change: "Who Owns the 500?" asked the magazine, which publishes the FORTUNE 500 list of America's biggest public companies. To this rhetorical question, the magazine answered,emphatically, "You do!"
The magazine went on to cite research by CDA Equity Intelligence that found "the little guy" owns about 80% of the shares of the FORTUNE 500 companies.
In the April 29, 1996 article, FORTUNE did not discuss the 'little guy' investing through mutual funds and pension funds, but it does show us where the trend of ownership has moved and is moving.
Becoming Owners
But, let's back up and start at the beginning, so to speak. We start with the statement of income and expenses you receive from your employer when you get paid. You know, the one that shows your gross pay, your deductions, and the amount of net pay attached or deposited in your bank account
One of those deduction lines will list CPP or Canada Pension Plan, and it states the amount withheld from your pay. Normally, your employer contributes an equal amount in your name. If your company has a pension plan of its own, you may also see a deduction for that
If you're self-employed, you won't get a statement of income and expenses; however, when you file your annual income tax return, you will make a payment as part of your filing (since you don't have an employer, you have to pay the full amount)
Whether you're self-employed, or work for someone else, you might also contribute to a mutual fund or a whole life insurance policy. You might even buy stocks, bonds, or Exchange Traded Funds (ETFs) on your own, although far fewer Canadians of modest means invest this way
Whichever it is, your dollars and cents ultimately will be invested in Canadian corporations and corporations around the world. Some will go into bonds (loans to corporations), but most will go into stocks (also called equities).
And, when you buy a stock, you buy a part of the corporation. You become an actual owner, a shareholder. In the case of mutual funds and whole life insurance policies, the connection is not quite that direct. When you buy a unit in a mutual fund or insurance policy, the fund manager shares ownership with you
For contributors to pension plans, including CPP, you and your fellow plan members collectively own the stocks bought by the plan. Your money was invested by professional managers on your behalf
For Example...
Let's go back to the Ontario Teachers Pension Plan, with which we started this chapter. It has 284,000 members, including both active teachers and retired teachers. And, it managed a fund of more than $87-billion at the beginning of 2010. That's almost a tenth of a trillion dollars
That $87-billion came from three main sources: the teachers themselves, the government of Ontario which makes an employer's contributions, and earnings from the Plan's portfolio of investments
With the exception of a small amount held back for administrative costs, the incoming contributions and investment income go to retired teachers, or is reinvested. The money for reinvestment goes to a team of 180 investment professionals (based on information at www.otpp.com in January 2008)
The investment team has put the money to work, as follows (based on information at www.otpp.com in January 2008):
- Public equities, including companies such as the German firm Deutsche Telekom AG and the Canadian corporation Maple Leaf Foods
- Real estate, including Toronto Eaton Centre and Vancouver's Pacific Centre
- Private equity, including Maple Leaf Sports & Entertainment Ltd. (the owner of the Toronto Maple Leafs hockey team) and GNC Corporation (which sells vitamins and other health-related products in malls everywhere)
- Infrastructure and timberland, which invests in regulated utilities, airports, timberland and container terminals
- Fixed income products, which include Government of Canada bonds and corporate bonds of both Canadian and international companies
- Real-return products, including U.S. and Canadian government bonds with protection against inflation
We also note, "The plan relies heavily on the investment program to generate the returns required to pay pensions"
And that's how Ontario's teachers and retired teachers ended up owning such a big chunk of Canada's big corporations.You may not be an Ontario teacher, but the odds are you belong to a plan that does the same thing, with the same results for you
The Systems
Earlier, I noted, "...the emergence of a system in which working and middle class people methodically increase their wealth and power." Let's now explore those ideas, to develop further insight
The first system, which drives both pension plans and mutual funds, comes through regular contributions. Scratch any investment advisor and one of the first pieces of advice you'll get is to "pay yourself first". This refers to the idea that if you take a small amount out of each paycheque, especially at source, you won't miss it too much. At the same time, if you invest that money, it will increase and over time grow into sizable nest egg
That's what the CPP and pension plans do for us, usually whether we like it or not. Canada Pension Plan contributions are compulsory for all working people in the country, and currently amount to just under 10% of our gross income (half paid by the employer, and half by the employee). Coincidentally, or not, this is the amount many financial advisors recommend saving. Other pension plans may withhold more or less than 10%, but the principle works in the same way, and many make participation in the plan a condition of employment
Mutual funds and insurance policies vary somewhat, because we voluntarily sign up for them. In addition, we decide how much we will contribute. Having made that decision, many of us are helped out by a banking innovation: the automatic withdrawal. Without having to make a decision every month, many of us take the path of least resistance and become regular savers
The second system that's leading to greater wealth and power for working people is age-old: compound interest. In other words, not only do you earn interest on your investment, but over time you begin earning interest on the interest, speeding up accumulation. Some have called compound interest the 8th Wonder of the World -- of course it's not so wonderful if you're on the other end of transaction, as is the case with credit card debt
In assessing compounding, it's helpful to know the Rule of 72, which will tell you how many years it takes for an investment to double, given that you know the rate of interest you're earning. So far example, the Ontario Teachers' Pension Plan earned an average of 9.6% per year between 1990 and the end of 2008. At a rate of 9.6% an investment doubles in 7 and a half years (72 divided by 9.6). If you have an investment returning 5%, you would double your money in 14.4 years (72 divided by 5).
Combine the power of compounding with the massive flows of contributions collected by all the pension funds and mutual funds in Canada, as well as the earnings of those funds, and you have a recipe for the continuously growing wealth of Canadians
Beyond Our Borders
Canadians make up just a fraction of the number of people around the world becoming owners. In every developed country, and even some developing countries, working and middle class people are also buying shares in corporations
They're all driven by the same forces as we are: longer life spans, the wherewithal to save for better retirement incomes, and a determination to avoid poverty in old age. Like us, they're using government, company/union, and individual retirement income plans to prepare and protect their standards of living after they stop working
In the United States, basic government pensions are covered by the Social Security Administration. It collects funding for pensions through payroll taxes (the equivalent of our CPP withholdings) and makes payments to seniors from the money that comes in. Unlike the Canadian system, the Social Security system does not invest in equities, just government treasury bills. This limits the growth of reserve funds, and the system is expected to start paying out more than it takes in by 2017.
Many Americans also have employer or union sponsored pension plans. As in Canada, institutional investors now dominate the stock markets and many other trading forums. They can literally ‘move' markets when they buy or sell stocks
The best known, and the biggest of American funds, is CALPERS, the California Public Employees Retirement System. It provides pension funding services for more than 1.6 million active and retired public employees. As of June 30, 2008, it managed a fund of $237.1 billion, almost a quarter of trillion dollars.
CALPERS is also a well known activist investor. In other words, it not only buys and sells stock in corporations, but will also try to persuade corporations to change policies that it considers detrimental to shareholders. In its words, "...our annual Focus List called attention to several U.S. companies with poor financial and corporate governance performance." To get changes, it first tries to work with management; if that fails, it uses it size and influence with other institutional investors to force (or try to force) changes at annual meetings of the targeted corporations
The most remarkable of international developments in the field of working and middle-class ownership comes in the developing world. In countries like India, some move directly from the peasantary to middle-class owners through pension funds. They're skipping the two hundred years of economic growth experienced in the developed world.
Importantly, they're also buying stock in Canadian corporations, and corporations elsewhere in the developed world. That's important because it will help cushion expected withdrawals by Baby Boomers as they move further into retirement. With Boomers selling stocks for income, and replacing stocks with less risky investments such as GICs, there's been fear that stock markets in the developed world might go down and not get back up
At the same time, Canadian pension funds and mutual funds continue to invest outside Canada. That's mainly in other developed nations, but also in the stocks of what are called Emerging Markets (corporations in the developing world)
They do this for two reasons: First, for diversification, and second for bargains. Diversification matters a lot when you're looking for steady returns over the long-term. Investing outside Canada provides double diversification, in fact. Other countries have different economic cycles, which means they may be growing while we're in recession, smoothing out the overall flow of returns. And, given Canada's overwhelming weighting in the commodities (especially energy) and financial sectors, investing outside the country allows them to diversify into sectors in which Canada doesn't have many big companies (for example, manufacturing, health care, and infrastructure)
So, What do We Own After All That?
Well, you and I, along with more than 12-million other working Canadians, own a piece of just about everything in big business (and some small businesses too).
We own oil companies and auto makers. Computer and printing companies. Software developers and computer chip manufacturers.
Collectively, we own trucking companies, electric companies, and grocery chains. We own national corporations and we own regional companies. We own pieces of multinational corporations and a piece of the mini-mall down the street.
Through our pension and mutual funds, we own both tobacco companies and drug companies that help smokers kick the habit. When oil prices go up, our pensions get a little bigger because oil company profits go up. At the same time, our pensions also get a bit smaller because airline profits go down.
When someone cheats an insurance company, our pensions get a bit smaller. When a bank makes larger profits, our pensions get a bit bigger.
Now here's a case that's more complicated: If a government sues a tobacco company and wins, is that good or bad? Well, usually that's bad for everybody but the lawyers who tried the case. For the rest of us, a tobacco lawsuit mostly moves money from the right pocket to the left pocket, minus the substantial fees charged by both the winning and losing lawyers.
The Ownership Revolution, then, represents an almost reverse fulfillment of the Marxist dream in which ordinary working people (the proletariat) would become the owners of the business sector (the means of production)
Ironically, this did not happen because of socialism or communism; it happened under free markets, or capitalism, because working people were allowed to pursue their individual dreams. And, for almost every one of us, the dream was more than avoidance of poverty in old age, it was to create retirement incomes that would allow us to pursue our dreams when we were no longer obligated to work
And, creating comfortable retirement incomes became possible in the years after World War II with the convergence of three broad trends: longer lifespans, increased prosperity in the developed nations, and financial innovations in the form of pension plans and mutual funds. We'll look at each of these trends in the following chapters
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