Recent calls by pension fund leaders for companies to rethink share buybacks and to invest more in their businesses are not resonating with some wealth management leaders.
With low interest rates and limited demand for companies' products, it seems unlikely investors would prefer executives to reallocate capital to expand their businesses, based on comments from several speakers at the 2015 Reuters Wealth Summit in New York this week.
"The tough challenge that they face is there's this excess capacity" that makes it unclear how firms could find better ways to spend their money, said Michael Weinberg, chief investment strategist of Protege Partners, a New York investment company that puts money into hedge funds.
Peter Charrington, global head of Citigroup Inc's private bank, said companies with significant share buybacks or paying out strong dividends are attractive for his investors.
"In an environment of very low interest rates, where we are today, our clients have looked for yield," Charrington said at the summit.
Companies in the S&P 500 index spent $566 billion buying back their shares in 2014, up from $480 billion in 2013 and the highest amount since 2007, according to FactSet. Many of the buybacks were in response to pressure from activist investors, and came despite record equity prices making the buybacks more expensive.
The pace of buybacks has sparked concerns from leaders of some top public pension funds that companies might do better by putting more of the money into their businesses, such as by hiring workers or building new plants.
"I don't think the best return on capital is just reducing your share count," said James Swanson, chief investment strategist for MFS Investment Management, in a telephone interview this week. On the other hand, companies mostly are using their own free cash flow for the buybacks, sustaining the pace.
"One thing that would alarm the market would be if they started borrowing to buy back shares," Swanson said.
So far, few wealthy investors seem focused on the debate over buybacks, however, based on comments at this week's summit.
"I don't think most of our investors think about that," said John Thiel, head of Merrill Lynch Wealth Management, a Bank of America unit.
Follow Reuters Summits on Twitter: @Reuters_Summits
(Editing by Jonathan Oatis)