Institutional Investor
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An institutional investor is an entity that pools money to purchase
securities A security is a tradable financial asset. The term commonly refers to any form of financial instrument, but its legal definition varies by jurisdiction. In some countries and languages people commonly use the term "security" to refer to any for ...
,
real property In English common law, real property, real estate, immovable property or, solely in the US and Canada, realty, refers to parcels of land and any associated structures which are the property of a person. For a structure (also called an Land i ...
, and other investment assets or originate loans. Institutional
investor An investor is a person who allocates financial capital with the expectation of a future Return on capital, return (profit) or to gain an advantage (interest). Through this allocated capital the investor usually purchases some species of pr ...
s include commercial banks,
central banks A central bank, reserve bank, national bank, or monetary authority is an institution that manages the monetary policy of a country or monetary union. In contrast to a commercial bank, a central bank possesses a monopoly on increasing the monet ...
, credit unions, government-linked companies, insurers,
pension fund A pension fund, also known as a superannuation fund in some countries, is any program, fund, or scheme which provides pension, retirement income. The U.S. Government's Social Security Trust Fund, which oversees $2.57 trillion in assets, is the ...
s,
sovereign wealth fund A sovereign wealth fund (SWF), or sovereign investment fund, is a state-owned investment fund that invests in real and financial assets such as stocks, Bond (finance), bonds, real estate, precious metals, or in alternative investments such as ...
s,
charities A charitable organization or charity is an organization whose primary objectives are philanthropy and social well-being (e.g. educational, religious or other activities serving the public interest or common good). The legal definition of a cha ...
, hedge funds, real estate investment trusts, investment advisors, endowments, and
mutual funds A mutual fund is an investment fund that pools money from many investors to purchase securities. The term is typically used in the United States, Canada, and India, while similar structures across the globe include the SICAV in Europe ('investmen ...
. 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 Corporate governance refers to the mechanisms, processes, practices, and relations by which corporations are controlled and operated by their boards of directors, managers, shareholders, and stakeholders. Definitions "Corporate governance" may ...
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 In finance, assets under management (AUM), sometimes called fund under management, refers to the total market value of all financial assets that a financial institution—such as a mutual fund, venture capital firm, or depository institutio ...
(AuM). 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. 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. The potential of institutional investors in infrastructure markets is increasingly noted after the financial crises in the early twenty-first century.


History


Ancient Rome and Islam

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. 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 Christianity is an Abrahamic monotheistic religion, which states that Jesus in Christianity, Jesus is the Son of God (Christianity), Son of God and Resurrection of Jesus, rose from the dead after his Crucifixion of Jesus, crucifixion, whose ...
. 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 AD are amongst the longest standing charities in the world (see for instance the Imam Reza shrine).


Pre-industrial Europe

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, 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 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 48% of US equities and certainly even less in other countries.


Overview

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". 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

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.


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

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. 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

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

* Asset manager *
Bank A bank is a financial institution that accepts Deposit account, deposits from the public and creates a demand deposit while simultaneously making loans. Lending activities can be directly performed by the bank or indirectly through capital m ...
*
Endowment fund A financial endowment is a legal structure for managing, and in many cases indefinitely perpetuating, a pool of financial, real estate, or other investments for a specific purpose according to the will of its founders and donors. Endowments are ...
* Foundation *
Hedge fund A hedge fund is a Pooling (resource management), pooled investment fund that holds Market liquidity, liquid assets and that makes use of complex trader (finance), trading and risk management techniques to aim to improve investment performance and ...
* Insurance company * Investment company * Investment trust *
Mutual fund A mutual fund is an investment fund that pools money from many investors to purchase Security (finance), securities. The term is typically used in the United States, Canada, and India, while similar structures across the globe include the SICAV in ...
*
Pension fund A pension fund, also known as a superannuation fund in some countries, is any program, fund, or scheme which provides pension, retirement income. The U.S. Government's Social Security Trust Fund, which oversees $2.57 trillion in assets, is the ...
*
Sovereign wealth fund A sovereign wealth fund (SWF), or sovereign investment fund, is a state-owned investment fund that invests in real and financial assets such as stocks, Bond (finance), bonds, real estate, precious metals, or in alternative investments such as ...
*
Unit trust A unit trust is a form of collective investment constituted under a trust deed. A unit trust pools investors' money into a single fund, which is managed by a fund manager. Unit trusts offer access to a wide range of investments, and depending on ...
and unit investment trust * Family offices


Regional

In various countries different types of institutional investors may be more important. In oil-exporting countries
sovereign wealth fund A sovereign wealth fund (SWF), or sovereign investment fund, is a state-owned investment fund that invests in real and financial assets such as stocks, Bond (finance), bonds, real estate, precious metals, or in alternative investments such as ...
s are very important, while in developed countries,
pension fund A pension fund, also known as a superannuation fund in some countries, is any program, fund, or scheme which provides pension, retirement income. The U.S. Government's Social Security Trust Fund, which oversees $2.57 trillion in assets, is the ...
s may be more important.


Canada

Some examples of important Canadian institutional investors are: * Canada Pension Plan Investment Board ( C$420.4 billion 019 * Caisse de dépôt et placement du Québec (C$340.1 billion 019 * Ontario Teachers' Pension Plan (C$207.4 billion 019 * British Columbia Investment Management Corporation (C$153.4 billion 019 * Ontario Municipal Employees Retirement System (C$105 billion) * Healthcare of Ontario Pension Plan ((C$100 billion) * AIMCo (C$118.8 billion 019 * Labourers Pension Fund of Central and Eastern Canada (C$8 billion) * College of Applied Arts and Technology Pension Plan (C$13.5 billion) * OPSEU Pension Trust (C$22 billion) * Canadian Pacific (C$14.3 billion) * Canadian National (C$19.4 billion)


China

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


India

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


Japan

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). These include: * Government Pension Investment Fund ( $1045.5 billion 011 * Local Government Officials ($165 billion 004 * Pension Fund Association ($117 billion 004


United Kingdom

In the UK, institutional investors may play a major role in economic affairs, and are highly concentrated in the
City of London The City of London, also known as ''the City'', is a Ceremonial counties of England, ceremonial county and Districts of England, local government district with City status in the United Kingdom, city status in England. It is the Old town, his ...
'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.


United States

Some examples of important U.S. institutional investors are: * Alaska Permanent Fund ($73 billion 021 * Ensign Peak Advisors ($100 billion 019 * CalPERS ($389 billion 020 * CalSTRS ($282 billion 021 * Harvard University endowment ($42 billion 020 * New York State Common Retirement ($248 billion 020 *
Princeton University Princeton University is a private university, private Ivy League research university in Princeton, New Jersey, United States. Founded in 1746 in Elizabeth, New Jersey, Elizabeth as the College of New Jersey, Princeton is the List of Colonial ...
endowment ($27 billion 020 *
Stanford University Leland Stanford Junior University, commonly referred to as Stanford University, is a Private university, private research university in Stanford, California, United States. It was founded in 1885 by railroad magnate Leland Stanford (the eighth ...
endowment ($30 billion 020 * Teacher Retirement System of Texas ($165 billion 020 * Yale University endowment ($31 billion 020 *
MIT The Massachusetts Institute of Technology (MIT) is a private research university in Cambridge, Massachusetts, United States. Established in 1861, MIT has played a significant role in the development of many areas of modern technology and sc ...
endowment ($24 billion 023 * UTIMCO endowment ($75 billion 024 *
University of Pennsylvania The University of Pennsylvania (Penn or UPenn) is a Private university, private Ivy League research university in Philadelphia, Pennsylvania, United States. One of nine colonial colleges, it was chartered in 1755 through the efforts of f ...
endowment ($21 billion 023 *
University of Notre Dame The University of Notre Dame du Lac (known simply as Notre Dame; ; ND) is a Private university, private Catholic research university in Notre Dame, Indiana, United States. Founded in 1842 by members of the Congregation of Holy Cross, a Cathol ...
endowment ($18.9 billion 023 *
Columbia University Columbia University in the City of New York, commonly referred to as Columbia University, is a Private university, private Ivy League research university in New York City. Established in 1754 as King's College on the grounds of Trinity Churc ...
endowment ($13.6 billion 023 *
Duke University Duke University is a Private university, private research university in Durham, North Carolina, United States. Founded by Methodists and Quakers in the present-day city of Trinity, North Carolina, Trinity in 1838, the school moved to Durham in 1 ...
endowment ($18 billion 023 The major investor associations are: *Investment Management Association * Association of British Insurers * National Association of Pension Funds * The Association of Investment Trust Companies 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.


See also

* Global assets under management *
Investment management Investment management (sometimes referred to more generally as financial asset management) is the professional asset management of various Security (finance), securities, including shareholdings, Bond (finance), bonds, and other assets, such as r ...
*
List of institutional investors in the United Kingdom This is a list of institutional investors in the United Kingdom. Institutional investors manage other people's money by buying shares in companies, corporate bonds, gilts (i.e. government debt), commodities, foreign currencies, or combinations of e ...
*
Private placement Private placement (or non-public offering) is a funding round of securities which are sold not through a public offering, but rather through a private offering, mostly to a small number of chosen investors. Generally, these investors include frien ...


Notes


References

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 Paul Lyndon Davies King's Counsel, KC (Hon), British Academy, FBA (born 24 September 1944) is Allen & Overy Professor of Corporate law, Corporate Law Emeritus at the University of Oxford, Emeritus Fellow of Balliol College, Oxford, Emeritus Fello ...
, "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)


External links

*
''Institutional Investor Magazine''
{{DEFAULTSORT:Institutional Investor Investment