Institutional investor
Encyclopedia
Institutional investors are organizations which pool large sums of money and invest those sums in securities, real property
and other investment assets. They can also include operating companies which decide to invest their profits to some degree in these types of assets.
Types of typical investors include banks, insurance companies
, retirement or pension fund
s, hedge fund
s, investment advisors
and mutual fund
s. Their role in the economy is to act as highly specialized investors on behalf of others. For instance, an ordinary person will have a pension from his employer. The employer gives that person's pension contributions to a fund. The fund will buy shares in a company, or some other financial product. Funds are useful because they will hold a broad portfolio
of investments in many companies. This spreads risk, so if one company fails, it will be only a small part of the whole fund's investment.
Institutional investors will have a lot of influence in the management of corporations because they will be entitled to exercise the voting rights in a company. They can actively engage in corporate governance
. Furthermore, because institutional investors have the freedom to buy and sell shares, they can play a large part in which companies stay solvent, and which go under. Influencing the conduct of listed companies, and providing them with capital are all part of the job of investment management
.
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. In the South of Gaul, aqueducts were sometimes financed in a similar fashion.
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.
Alongside some Christian monasteries the waqfs created in the 10th century CE are amongst the longest standing charities in the world (see for instance the Imam Reza shrine
).
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.
under Rule 506 of Regulation D may be made to an "accredited investor
" without registering the offering of securities with the Securities and Exchange Commission. In essence institutional investor, an accredited investor is defined in the rule as:
such as Malaysia and India
.
In countries like India
, statutory agencies 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.
sovereign wealth fund
s are very important, while in developed countries
, pension fund
s may be more important.
'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 be able to muster over half of the votes.
The major investor associations are:
The IMA, ABI, NAPF, and AITC, plus the British Merchant Banking and Securities House Association are also represented by the Institutional Shareholder Committee.
Real property
In English Common Law, real property, real estate, realty, or immovable property is any subset of land that has been legally defined and the improvements to it made by human efforts: any buildings, machinery, wells, dams, ponds, mines, canals, roads, various property rights, and so forth...
and other investment assets. They can also include operating companies which decide to invest their profits to some degree in these types of assets.
Types of typical investors include banks, insurance companies
Insurance
In law and economics, insurance is a form of risk management primarily used to hedge against the risk of a contingent, uncertain loss. Insurance is defined as the equitable transfer of the risk of a loss, from one entity to another, in exchange for payment. An insurer is a company selling the...
, retirement or pension fund
Pension fund
A pension fund is any plan, fund, or scheme which provides retirement income.Pension funds are important shareholders of listed and private companies. They are especially important to the stock market where large institutional investors dominate. The largest 300 pension funds collectively hold...
s, hedge fund
Hedge fund
A hedge fund is a private pool of capital actively managed by an investment adviser. Hedge funds are only open for investment to a limited number of accredited or qualified investors who meet criteria set by regulators. These investors can be institutions, such as pension funds, university...
s, investment advisors
Registered Investment Advisor
The term Registered Investment Adviser is used to describe an Investment Adviser who is registered with the Securities and Exchange Commission or a state's securities agency. The term has been popularized due to its use within the Investment Advisers Act of 1940 and its association to the term...
and mutual fund
Mutual fund
A mutual fund is a professionally managed type of collective investment scheme that pools money from many investors to buy stocks, bonds, short-term money market instruments, and/or other securities.- Overview :...
s. Their role in the economy is to act as highly specialized investors on behalf of others. For instance, an ordinary person will have a pension from his employer. The employer gives that person's pension contributions to a fund. The fund will buy shares in a company, or some other financial product. Funds are useful because they will hold a broad portfolio
Portfolio (finance)
Portfolio is a financial term denoting a collection of investments held by an investment company, hedge fund, financial institution or individual.-Definition:The term portfolio refers to any collection of financial assets such as stocks, bonds and cash...
of investments in many companies. This spreads risk, so if one company fails, it will be only a small part of the whole fund's investment.
Institutional investors will have a lot of influence in the management of corporations because they will be entitled to exercise the voting rights in a company. They can actively engage in corporate governance
Corporate governance
Corporate governance is a number of processes, customs, policies, laws, and institutions which have impact on the way a company is controlled...
. Furthermore, because institutional investors have the freedom to buy and sell shares, they can play a large part in which companies stay solvent, and which go under. Influencing the conduct of listed companies, and providing them with capital are all part of the job of investment management
Investment management
Investment management is the professional management of various securities and assets in order to meet specified investment goals for the benefit of the investors...
.
Ancient Rome and medieval Islam
Roman law ignored the concept of juristic person, yet at the time the practice of private evergetismEvergetism
Euergetism is a term coined by French historian A Boulanger, deriving from Greek εύεργετέω meaning "I do good things". It is the practice of wealth or high-status individuals distributing a part of their wealth to the community, rather than to individuals, as was the case with patron-client...
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. In the South of Gaul, aqueducts were sometimes financed in a similar fashion.
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
Waqf
A waqf also spelled wakf formally known as wakf-alal-aulad is an inalienable religious endowment in Islamic law, typically denoting a building or plot of land for Muslim religious or charitable purposes. The donated assets are held by a charitable trust...
(charitable institution) became a cornerstone of the financing of education, waterworks, welfare and even the construction of monuments.
Alongside some Christian monasteries the waqfs created in the 10th century CE are amongst the longest standing charities in the world (see for instance the Imam Reza shrine
Imam Reza shrine
Imām Reza shrine in Mashhad, Iran is a complex which contains the mausoleum of Imam Reza, the eighth Imām of Twelver Shi'ites. It is the largest mosque in the world by dimension and the second largest in capacity...
).
Pre-industrial Europe
Following the spread of monasteries, almhouses 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 institution 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, and the 17th century for France and the Dutch Republic). 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
Tontine
A tontine is an investment scheme for raising capital, devised in the 17th century and relatively widespread in the 18th and 19th. It combines features of a group annuity and a lottery. Each subscriber pays an agreed sum into the fund, and thereafter receives an annuity. As members die, their...
shares allowing them to spread risk and become some of the earliest speculative institutions known in the West.
Before 1980
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. 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 only 7% of US equities and certainly even less in other countries.Overview
Because of their sophistication, institutional investors may often participate in private placements of securities, in which certain aspects of the securities laws may be inapplicable. For example, in the United States, a private placementPrivate placement
Private placement is a funding round of securities which are sold without an initial public offering, usually to a small number of chosen private investors...
under Rule 506 of Regulation D may be made to an "accredited investor
Accredited investor
Accredited investor is a term defined by various securities laws that delineates investors permitted to invest in certain types of higher risk investments including seed money, limited partnerships, hedge funds, and angel investor networks...
" without registering the offering of securities with the Securities and Exchange Commission. In essence institutional investor, an accredited investor is defined in the rule as:
- a bank, insurance company, registered investment company (generally speaking, a mutual fund), business development company, or small business investment company;
- an employee benefit plan, within the meaning of the Employee Retirement Income Security ActEmployee Retirement Income Security ActThe Employee Retirement Income Security Act of 1974 is an American federal statute that establishes minimum standards for pension plans in private industry and provides for extensive rules on the federal income tax effects of transactions associated with employee benefit plans...
, if a bank, insurance company, or registered investment adviserRegistered Investment AdvisorThe term Registered Investment Adviser is used to describe an Investment Adviser who is registered with the Securities and Exchange Commission or a state's securities agency. The term has been popularized due to its use within the Investment Advisers Act of 1940 and its association to the term...
makes the investment decisions, or if the plan has total assets in excess of $5 million; - a charitable organization, corporation, or partnership with assets exceeding $5 million;
- a director, executive officer, or general partner of the company selling the securities;
- a business in which all the equity owners are accredited investors;
- a natural person who has individual net worth, or joint net worth with the person’s spouse, that exceeds $1 million at the time of the purchase;
- a natural person with income exceeding $200,000 in each of the two most recent years or joint income with a spouse exceeding $300,000 for those years and a reasonable expectation of the same income level in the current year; or
- a trust with assets in excess of $5 million, not formed to acquire the securities offered, whose purchases a sophisticated person makes.
Economic theory
By definition, institutional investors are opposed to individual actors on the financial markets. This specificity has majors consequences in the eyes of economic theory.Institutional investors as financial intermediaries
Numerous institutional investors act as intermediaries between lenders and borrowers. As such, they have a critical importance in the functioning of the financial markets. Economies of scale imply that they increase returns on investments and diminish the cost of capital for entrepreneurs. Acting as savings pools, they also play a critical role in guaranteeing a sufficient diversification of the investors’ portfolios. Their greater ability to monitor corporate behaviour as well to select investors profiles implies that they help diminish agency costs.”Doing God’s work”
The expression “doing God’s work”, commonly used by employees of institutional investors to describe their job, refers to the fact that their professionalism and greater computing abilities allow them to detect early –and benefit from– information affecting the markets. By doing so, institutional investors make the markets more efficient.Life cycle
Institutional investors differ among each other but they all have in common the fact of not sharing the same life cycle as human beings. Unlike individuals, they do not have a phase of accumulation (active work life) followed by one of consumption (retirement), and they do not die. Here insurance companies differ from the rest of the institutional investors, as they cannot guess when they will have to repay their clients, they need highly liquid assets which reduces their investment opportunities. Others like pension funds can predict long ahead when they will have to repay their investors allowing them to invest in much less liquid assets such as private equities, hedge funds or commodities. Finally, other institutions have an investment horizon extremely vast allowing them to invest in highly illiquid assets since they are unlikely to be forced to sell them before term. A famous example of this type of investors are US universities endowment funds.Institutional investor types
- Pension fundPension fundA pension fund is any plan, fund, or scheme which provides retirement income.Pension funds are important shareholders of listed and private companies. They are especially important to the stock market where large institutional investors dominate. The largest 300 pension funds collectively hold...
- Mutual fundMutual fundA mutual fund is a professionally managed type of collective investment scheme that pools money from many investors to buy stocks, bonds, short-term money market instruments, and/or other securities.- Overview :...
- Investment trustInvestment trustAn Investment trust is a form of collective investment found mostly in the United Kingdom. Investment trusts are closed-end funds and are constituted as public limited companies....
- Unit trustUnit trustA unit trust is a form of collective investment constituted under a trust deed.Found in Australia, Ireland, the Isle of Man, Jersey, New Zealand, South Africa, Singapore, Malaysia and the UK, unit trusts offer access to a wide range of securities....
and Unit Investment TrustUnit Investment TrustA Unit Investment Trust is a US investment company offering a fixed portfolio of securities having a definite life. UITs are assembled by a sponsor and sold through brokers to investors.-Types:... - Investment bankingInvestment bankingAn investment bank is a financial institution that assists individuals, corporations and governments in raising capital by underwriting and/or acting as the client's agent in the issuance of securities...
- Hedge fundHedge fundA hedge fund is a private pool of capital actively managed by an investment adviser. Hedge funds are only open for investment to a limited number of accredited or qualified investors who meet criteria set by regulators. These investors can be institutions, such as pension funds, university...
- Sovereign wealth fundSovereign wealth fundA sovereign wealth fund is a state-owned investment fund composed of financial assets such as stocks, bonds, property, precious metals or other financial instruments. Sovereign wealth funds invest globally. Some of them have grabbed attention making bad investments in several Wall Street financial...
- Endowment fund
- Insurance companies
Globalization of financial markets
When considered from a strictly local standpoint, institutional investors are sometimes called foreign institutional investors (FIIs). This expression is mostly used in emerging marketsEmerging markets
Emerging markets are nations with social or business activity in the process of rapid growth and industrialization. Based on data from 2006, there are around 28 emerging markets in the world . The economies of China and India are considered to be the largest...
such as Malaysia and India
India
India , officially the Republic of India , is a country in South Asia. It is the seventh-largest country by geographical area, the second-most populous country with over 1.2 billion people, and the most populous democracy in the world...
.
In countries like India
India
India , officially the Republic of India , is a country in South Asia. It is the seventh-largest country by geographical area, the second-most populous country with over 1.2 billion people, and the most populous democracy in the world...
, statutory agencies 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.
Regional
In various countries different types of institutional investors may be more important. In oil-exporting countriesOPEC
OPEC is an intergovernmental organization of twelve developing countries made up of Algeria, Angola, Ecuador, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, the United Arab Emirates, and Venezuela. OPEC has maintained its headquarters in Vienna since 1965, and hosts regular meetings...
sovereign wealth fund
Sovereign wealth fund
A sovereign wealth fund is a state-owned investment fund composed of financial assets such as stocks, bonds, property, precious metals or other financial instruments. Sovereign wealth funds invest globally. Some of them have grabbed attention making bad investments in several Wall Street financial...
s are very important, while in developed countries
Developed country
A developed country is a country that has a high level of development according to some criteria. Which criteria, and which countries are classified as being developed, is a contentious issue...
, pension fund
Pension fund
A pension fund is any plan, fund, or scheme which provides retirement income.Pension funds are important shareholders of listed and private companies. They are especially important to the stock market where large institutional investors dominate. The largest 300 pension funds collectively hold...
s may be more important.
Canada
The most important Canadian institutional investors are:- Caisse de dépôt et placement du QuébecCaisse de dépôt et placement du QuébecThe Caisse de dépôt et placement du Québec manages public pension plans in the Canadian province of Quebec. It was founded in 1965 by an act of the National Assembly...
(C$Canadian dollarThe Canadian dollar is the currency of Canada. As of 2007, the Canadian dollar is the 7th most traded currency in the world. It is abbreviated with the dollar sign $, or C$ to distinguish it from other dollar-denominated currencies...
237.3 billion [2007]) - Canada Pension PlanCanada Pension PlanThe Canada Pension Plan is a contributory, earnings-related social insurance program. It forms one of the two major components of Canada's public retirement income system, the other component being Old Age Security...
(C$116.6 Billion [2007]) - Ontario Teachers' Pension PlanOntario Teachers' Pension PlanThe Ontario Teachers' Pension Plan , commonly referred to as Teachers, is the organization responsible for administering pensions for public school teachers of the Canadian province of Ontario. The OTPP also invests the plan's pension fund, making it one of the largest and most powerful investment...
(C$106 billion [2006]) - British Columbia Investment Management (C$83.4 billion [2007])
- Alberta Investment ManagementAlberta Investment ManagementAlberta Investment Management Corporation is one of Canada's largest institutional investment fund managers. It is headquartered in Edmonton, Alberta....
(C$73.3 billion [2007])
United Kingdom
In the UK, institutional investors may play a major role in economic affairs, and are highly concentrated in the City of LondonCity of London
The City of London is a small area within Greater London, England. It is the historic core of London around which the modern conurbation grew and has held city status since time immemorial. The City’s boundaries have remained almost unchanged since the Middle Ages, and it is now only a tiny part of...
'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 be able to muster over half of the votes.
The major investor associations are:
- Investment Management Association
- Association of British InsurersAssociation of British InsurersThe Association of British Insurers or ABI is a trade association made up of insurance companies in the United Kingdom.-History:The ABI began in 1985 after several specialised insurance industry trade associations, including the British Insurance Association, the Life Offices’ Association, the Fire...
- National Association of Pension FundsNational Association of Pension FundsThe National Association of Pension Funds is the leading body in the UK for providing representation and other services to those involved in designing, operating, advising and investing in all aspects of workplace pensions.-Function:...
- The Association of Investment Trust CompaniesThe Association of Investment Trust CompaniesThe Association of Investment Companies is the United Kingdom trade association for the closed-ended investment company industry.-Function:...
The IMA, ABI, NAPF, and AITC, plus the British Merchant Banking and Securities House Association are also represented by the Institutional Shareholder Committee.