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Institutional investor

From Wikipedia, the free encyclopedia
For the magazine, see Institutional Investor (magazine).

An institutional investor is an entity that pools money to purchase securities, real property, and other investment assets or originate loans. Institutional investors include commercial banks, central banks, credit unions, government-linked companies, insurers, pension funds, sovereign wealth funds, charities, hedge funds, real estate investment trusts, investment advisors, endowments, and mutual funds. Operating companies which invest excess capital in these types of assets may also be included in the term. Activist institutional investors may also influence corporate governance by exercising voting rights in their investments. In 2019, the world's top 500 asset managers collectively managed $104.4 trillion in Assets under Management (AuM).[1]

Institutional investors appear to be more sophisticated than retail investors, but it remains unclear if professional active investment managers can reliably enhance risk-adjusted returns by an amount that exceeds fees and expenses of investment management because of issues with limiting agency costs.[2]: 4  Lending credence to doubts about active investors' ability to 'beat the market', passive index funds have gained traction with the rise of passive investors: the three biggest US asset managers together owned an average of 18% in the S&P 500 Index and together constituted the largest shareholder in 88% of the S&P 500 by 2015.[3] The potential of institutional investors in infrastructure markets is increasingly noted after the financial crises in the early twenty-first century.[4]

History

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Ancient Rome and Islam

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Inscription honoring Aristoxénos, son of Demophon, probably benefactor of the gymnasium in Athens, late third or second century BC, Musée du Louvre

Roman law ignored the concept of juristic person, yet at the time the practice of private evergetism (which dates to, at least, the 4th century BC in Greece) sometimes led to the creation of revenues-producing capital which may be interpreted as an early form of charitable institution. In some African colonies in particular, part of the city's entertainment was financed by the revenue generated by shops and baking-ovens originally offered by a wealthy benefactor.[5] In the south of Gaul, aqueducts were sometimes financed in a similar fashion.[6]

The legal principle of juristic person might have appeared with the rise of monasteries in the early centuries of Christianity. The concept then might have been adopted by the emerging Islamic law. The waqf (charitable institution) became a cornerstone of the financing of education, waterworks, welfare and even the construction of monuments.[7] Alongside some Christian monasteries[8] the waqfs created in the 10th century AD are amongst the longest standing charities in the world (see for instance the Imam Reza shrine).

Pre-industrial Europe

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Following the spread of monasteries, almshouses and other hospitals, donating sometimes large sums of money to institutions became a common practice in medieval Western Europe. In the process, over the centuries those institutions acquired sizable estates and large fortunes in bullion. Following the collapse of the agrarian revenues, many of these institutions moved away from rural real estate to concentrate on bonds emitted by the local sovereign (the shift dates back to the 15th century for Venice,[9] and the 17th century for France[10] and the Dutch Republic[11]). The importance of lay and religious institutional ownership in the pre-industrial European economy cannot be overstated, they commonly possessed 10 to 30% of a given region arable land.

In the 18th century, private investors pool their resources to pursue lottery tickets and tontine shares allowing them to spread risk and become some of the earliest speculative institutions known in the West.

Before 1980

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Following several waves of dissolution (mostly during the Reformation and the Revolutionary period) the weight of the traditional charities in the economy collapsed; by 1800, institutions solely owned 2% of the arable land in England and Wales.[12] New types of institutions emerged (banks, insurance companies), yet despite some success stories, they failed to attract a large share of the public's savings and, for instance, by 1950, they owned 48% of US equities and certainly even less in other countries.[13]

Overview

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Financial market participants
Organisations
Terms

Because of their sophistication, institutional investors may be exempt from certain securities laws. For example, in the United States, institutional investors are generally eligible to purchase private placements under Rule 506 of Regulation D as "accredited investors".[14] Further, large US institutional investors may qualify to purchase certain securities generally restricted from retail investment under Rule 144A.

In Canada, companies selling to accredited investors can be exempted from regulatory reporting by each of the provincial Canadian Securities Administrators.

Institutional investors as financial intermediaries

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As intermediaries between individual investors and companies, institutional investors are important sources of capital in financial markets. By pooling constituents' investments, institutional investors arguably reduce the cost of capital for entrepreneurs while diversifying constituents' portfolios. Their greater ability to influence corporate behaviour as well to select investors profiles may help diminish agency costs. Moreover, institutional investors' role as financial intermediaries means they operate under different organizational structures and regulatory frameworks compared to individual blockholders. This unique positioning allows them to leverage their size and expertise to enforce better corporate governance practices.[15]

Institutional investors as limited partners, asset owners, and asset managers

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Within the various types of institutional investors, the roles of limited partners (LPs), asset owners, and asset managers are often conflated. In practice, these types of institutional investors play very different roles in the investment industry. Limited partners and asset owners have legal ownership of their assets and make asset allocation decisions. That is, the primary control over strategic asset allocation decisions rests with limited partners and asset owners, often in consultation with institutional investment consultants. Institutional investors such as pensions, endowments, foundations, and sovereign wealth funds are examples of institutional LPs and asset owners. Limited partners and asset owners may manage their assets directly. Alternatively, they may outsource some or all management of their assets to external asset managers.

In contrast, asset managers act as agents on behalf of limited partners and asset owners. Asset managers generally have little or no discretion on broad, strategic asset allocation decisions. However, asset managers generally have significant discretion regarding portfolio management, security selection, and risk management decisions, subject to any restrictions placed on them by their LPs and asset owners. Asset managers often have a duty to act as a fiduciary to their limited partners and asset owners. Namely, they must place the interests of their LPs and asset owners ahead of their own interests.

For a wide variety of reasons, LPs and asset owners may change asset allocations periodically which can lead to a shift of money, known as asset flows, from one asset class to another, or from one asset manager to another. Traditional asset managers invest in publicly traded equities or fixed income. In contrast, alternative asset managers, such as hedge funds and private equity firms, may invest in both traditional investments and alternative investments. Asset managers maintain relationships with their institutional LPs and asset owners through the process of investor relations.[16] For example, investor relations processes may include the asset manager regularly communicating investment performance, as well as important changes to the investment process, investment team, etc.

Institutional investment consultants

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Institutional investment consultants play an important role in the allocation of assets. These consultants act as an intermediary in an advisory capacity to institutional investors. They generally do not have discretion to manage the assets. Rather, they provide advice as to how the assets may be managed. Namely, they work closely with pension funds and other institutional investors providing independent investment advice that is meant to complement the institutional investors' knowledge and expertise. For example, a consultant may be hired by pension fund to advise the fund on portfolio construction, asset allocation, investment policy statements, performance monitoring, fund manager selection, etc. Institutional investors may also use these consultants as an extra layer of legal protection for their investment committees and boards by conveying that they adhere to industry best practices in their investment processes.

Institutional-investor types

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Regional

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In various countries different types of institutional investors may be more important. In oil-exporting countries sovereign wealth funds are very important, while in developed countries, pension funds may be more important.[17][citation needed]

Canada

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Some examples of important Canadian institutional investors are:

China

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China's program to allow institutional investors to invest in its capital market is called Qualified Foreign Institutional Investor (QWFII).

India

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In India, the term Foreign Institutional Investor (FII) is used to refer to foreign companies investing in India's capital markets.[23]

Recently FIIs have invested a total of $23 billion in the Indian market under this. With this, Foreign-exchange reserves of India have reached a total of $584 billion and it has become a new record in the Indian market.[24][25]

Also called Foreign direct investment or FDI, statutory agencies in India like SEBI have prescribed norms to register FIIs and also to regulate such investments flowing in through FIIs. In 2008, FIIs represented the largest institution investment category, with an estimated US$751.14 billion.[26]

Recently, FIIs recorded a net withdrawal of USD 770.67 million in a single trading day, including USD 440.86 million from equities, USD 327.44 million from debt, and USD 2.31 million from hybrid investments. Despite such withdrawals, total FII inflows for 2024 have remained positive at USD 18.241 billion, with fiscal year 2025 inflows at USD 8.924 billion, according to an SBI research report.[27][28]

Japan

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Japan is home to the world's largest pension fund (GPI) and is home to 63 of the top 300 pension funds worldwide (by Assets Under Management). [citation needed] These include:

United Kingdom

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In the UK, institutional investors may play a major role in economic affairs, and are highly concentrated in the City of London's square mile. Their wealth accounts for around two-thirds of the equity in public listed companies. For any given company, the largest 25 investors would have to be able to muster over half of the votes.[29]

United States

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Some examples of important U.S. institutional investors are:

The major investor associations are:

The IMA, ABI, NAPF, and AITC, plus the British Merchant Banking and Securities House Association were also represented by the Institutional Shareholder Committee (ISC). As of August 2014 the ISC effectively became the Institutional Investors Committee (IIC), which comprises the Association of British Insurers, the Investment Management Association and the National Association of Pension Funds.[48]

See also

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Notes

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  1. ^ "Global asset manager AuM tops $100 trillion for the first time" (Press release). 19 October 2020.
  2. ^ Hirst, Scott (1 July 2018). "The Case for Investor Ordering". The Harvard Law School Program on Corporate Governance Discussion Paper (2017–13).
  3. ^ Fichtner, Jan; Heemskerk, Eelke; Garcia-Bernardo, Javier (2017). "Hidden power of the Big Three? Passive index funds, re-concentration of corporate ownership, and new financial risk". Business and Politics. 19 (2): 298–326. doi:10.1017/bap.2017.6. hdl:11245.1/f0c4916f-f41e-43e6-9495-777c7c3f7914.
  4. ^ Koh, Jae Myong (2018) Green Infrastructure Financing: Institutional Investors, PPPs and Bankable Projects, Palgrave Macmillan.
  5. ^ N. Tran (2008) Les cités et le monde du travail urbain en Afrique romaine, in Le quotidien municipal dans l'Occident romain, M. Cébeillac-Gervasoni, C. Berrendonner and L. Lamoine (ed.), pp. 333–48.
  6. ^ R. Biundo (2008) Acqua publica: propriété et gestion de l'eau dans l'économie des cités de l'Empire, in Le quotidien municipal dans l'Occident romain, M. Cébeillac-Gervasoni, C. Berrendonner and L. Lamoine (ed.), pp. 365–78
  7. ^ J. Loiseau (2004) La Porte du vizir : programmes monumentaux et contrôle territorial au Caire à la fin du XIVe siècle. Histoire urbaine 9/1: 7–27.
  8. ^ For an example ad absurdo: M. Lewis (oct. 2010) Beware of Greeks Bearing Bonds. Vanity Fair.
  9. ^ Pullan, B. (1971) Rich and poor in Renaissance Venice. The Social Institutions of a Catholic State, to 1620. Oxford.
  10. ^ Berger P. (1978) Rural Charity in Late Seventeenth Century France: The Pontchartrain Case. French Historical Studies, 10/3: 393–415.
  11. ^ Gelderblom O. and J. Jonker (2007) With a view to hold. The emergence of institutional investors on the Amsterdam securities market during the 17th and 18th centuries. Utrecht University Working Papers
  12. ^ G. Clark and A. Clark (2001) Common Rights to Land in England, 1475–1839. The Journal of Economic History, 61/4: 1009–1036.
  13. ^ Chen X., J. Harford and K. Li (2007) Monitoring: Which institutions matter?. Journal of Financial Economics, 86: 279–305.
  14. ^ Twomey, Stephen (24 September 2021). "What Is An Accredited Investor?". BAM Capital. Retrieved 5 February 2023.
  15. ^ Dasgupta, Amil; Fos, Vyacheslav; Sautner, Zacharias (2021). "Institutional Investors and Corporate Governance". Foundations and Trends in Finance. 12 (4): 276–394.
  16. ^ "Institutional LPs - Investor Relations". institutionallps.com. Retrieved 11 May 2024.
  17. ^ Pension Fund Design in Developing Economies (PDF). Retrieved 5 February 2023.
  18. ^ "CPP Investments Net Assets Total $420.4 Billion at Third Quarter Fiscal 2020". Retrieved 5 May 2020.
  19. ^ "CDPQ posts a 10.4% annualized return in 2019 and 8.1% over five years". 20 February 2020. Retrieved 5 May 2020.
  20. ^ "Ontario Teachers' net assets at $207.4 billion at year-end 2019". Retrieved 5 May 2020.
  21. ^ "BCI Reports 6.1% Annual Return for Fiscal 2019". 31 July 2019. Retrieved 5 May 2020.
  22. ^ "AIMCo Earns 10.6% Return for Clients in 2019". Retrieved 5 May 2020.
  23. ^ "Definition of 'Fiis'". Economic Times. Retrieved 8 July 2020.
  24. ^ "Reserve Bank of India Weekly statistical report". Retrieved 12 February 2021.
  25. ^ "India receives highest FII inflows among emerging markets in 2020". 6 January 2021. Retrieved 6 January 2021.
  26. ^ "About FDI in India". India Brand Equity Foundation. 1 June 2020. Retrieved 8 July 2020.
  27. ^ ChiniMandi (8 November 2024). "Despite substantive outflows, FII investment in India still holds at USD 18.24 bn: SBI Report". ChiniMandi. Retrieved 9 November 2024.
  28. ^ "Research Desk - SBI In the News". sbi.co.in. Retrieved 9 November 2024.
  29. ^ see Brian Cheffins, Company Law, Theory Structure and Operation (1997) Oxford University Press, pp.636 ff.
  30. ^ "Home - Alaska Permanent Fund Corporation". Retrieved 25 February 2021.
  31. ^ Lovett, Ian; Levy, Rachael (8 February 2020). "The Mormon Church Amassed $100 Billion. It Was the Best-Kept Secret in the Investment World". Wall Street Journal. Retrieved 3 March 2021.
  32. ^ "CalPERS Reports Preliminary 4.7% Investment Return for Fiscal Year 2019-20". Archived from the original on 24 February 2021. Retrieved 25 February 2021.
  33. ^ "Current Investment Portfolio - CalSTRS.com". Retrieved 25 February 2021.
  34. ^ "Endowment - Harvard University". Retrieved 25 February 2021.
  35. ^ "NYS Common Retirement Fund Reports Third Quarter Results". 8 February 2021. Retrieved 25 February 2021.
  36. ^ "Princeton endowment returns 5.6% for fiscal year". 27 October 2020. Retrieved 25 February 2021.
  37. ^ "Stanford-University-Investment-Report-2020.pdf" (PDF). Retrieved 25 February 2021.
  38. ^ "Pension Fund Facts At A Glance". Retrieved 25 February 2021.
  39. ^ "Investment return of 6.8% brings Yale endowment value to $31.2 billion". 24 September 2020. Retrieved 25 February 2021.
  40. ^ "MIT releases financials and endowment figures for 2023". 6 October 2023. Retrieved 11 May 2024.
  41. ^ "Assets Under Management - UTIMCO". Retrieved 11 May 2024.
  42. ^ "About Us - Penn Office of Investments". Retrieved 11 May 2024.
  43. ^ "2023 Annual Report - University of Notre Dame" (PDF). Retrieved 11 May 2024.
  44. ^ Ghosh, Palash (20 July 2024). "Georgia Teachers chalks up 14.5% return in fiscal 2024". Pensions&Investments. Retrieved 30 December 2024.{{cite web}}: CS1 maint: url-status (link)
  45. ^ "IMC CEO Statement on FY23 Endowment Returns". 17 October 2023. Retrieved 11 May 2024.
  46. ^ "About - DUMAC Inc". Retrieved 11 May 2024.
  47. ^ The IMA is the result of a merger in 2002 between the Institutional Fund Managers Association and the Association of Unit Trusts and Investment Funds
  48. ^ "Institutional Investor COMMittee". www.iicomm.org. Archived from the original on 16 January 2016. Retrieved 23 February 2016.

References

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Articles

  • AA Berle, "Property, Production and Revolution" (1965) 65 Columbia Law Review 1
  • LW Beeferman, "Pension Fund Investment in Infrastructure: A Resource Paper", Capital Matter (Occasional Paper Series), No.3 December 2008
  • BS Black and JC Coffee, "Hail Britannia?: Institutional Investor Behavior under Limited Regulation" (1994) 92(7) Michigan Law Review 1997
  • G Clark and A Clark, "Common Rights to Land in England, 1475–1839" (2001) 61(4) The Journal of Economic History 1009
  • JC Coffee, "Liquidity versus Control: The Institutional Investor as Corporate Monitor" (1991) 91 Columbia Law Review 1277–1368
  • BL Connelly, R Hoskisson, L Tihanyi & ST Certo, "Ownership as a Form of Corporate Governance" (2010) Journal of Management Studies, Vol 47(8):1561-1589.
  • PL Davies, "Institutional investors in the United Kingdom" in T Baums et al., Institutional Investors and Corporate Governance (Walter de Gruyter 1994) ch 9
  • MN Firzli & V Bazi, "Infrastructure Investments in an Age of Austerity : The Pension and Sovereign Funds Perspective", USAK/JTW 30 July 2011 and Revue Analyse Financière, Q4 2011
  • KU Schmolke, "Institutional Investors' Mandatory Voting Disclosure: The Proposal of the European Commission against the Background of the US Experience" (2006) EBOLR 767

Books

  • A Chandler, The Visible Hand (1977)
  • PL Davis et al., Institutional Investors (MIT Press 2001)
  • MC Jensen (ed), Studies in the Theory of Capital Markets (F. Praeger 1972)
  • Jae Myong Koh, Green Infrastructure Financing: Institutional Investors, PPPs and Bankable Projects (Palgrave Macmillan, 2018)
  • GP Stapledon, Institutional Shareholders and Corporate Governance (Oxford 1996)
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