An institutional investor is an entity which 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, is land which is the property of some person and all structures (also called improvements or fixtures) integrated with or affixe ...

, and other investment assets or originate loans. Institutional investors include

commercial bank A commercial bank is a financial institution which accepts deposits from the public and gives loans for the purposes of consumption and investment to make profit. It can also refer to a bank, or a division of a large bank, which deals with cor ...

central bank A central bank, reserve bank, or monetary authority is an institution that manages the currency and monetary policy of a country or monetary union, and oversees their commercial banking system. In contrast to a commercial bank, a central ba ...

credit union A credit union, a type of financial institution similar to a commercial bank, is a member-owned nonprofit organization, nonprofit financial cooperative. Credit unions generally provide services to members similar to retail banks, including depo ...

government-linked companies A state-owned enterprise (SOE) is a government entity which is established or nationalised by the ''national government'' or ''provincial government'' by an executive order or an act of legislation in order to earn profit for the government ...

insurers Insurance is a means of protection from financial loss in which, in exchange for a fee, a party agrees to compensate another party in the event of a certain loss, damage, or injury. It is a form of risk management, primarily used to hedge ...

pension fund A pension fund, also known as a superannuation fund in some countries, is any plan, fund, or scheme which provides retirement income. Pension funds typically have large amounts of money to invest and are the major investors in listed and priva ...

sovereign wealth fund A sovereign wealth fund (SWF), sovereign investment fund, or social wealth fund is a state-owned investment fund that invests in real and financial assets such as stocks, bonds, real estate, precious metals, or in alternative investments such ...

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 fund A hedge fund is a pooled investment fund that trades in relatively liquid assets and is able to make extensive use of more complex trading, portfolio-construction, and risk management techniques in an attempt to improve performance, such as sho ...

REIT A real estate investment trust (REIT) is a company that owns, and in most cases operates, income-producing real estate. REITs own many types of commercial real estate, including office and apartment buildings, warehouses, hospitals, shopping ce ...

s, investment advisors, endowments, and

mutual fund A mutual fund is a professionally managed 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 i ...

s. Operating companies which invest excess capital in these types of assets may also be included in the term.

Activist Activism (or Advocacy) consists of efforts to promote, impede, direct or intervene in social, political, economic or environmental reform with the desire to make changes in society toward a perceived greater good. Forms of activism range fro ...

institutional investors may also influence

corporate governance Corporate governance is defined, described or delineated in diverse ways, depending on the writer's purpose. Writers focused on a disciplinary interest or context (such as accounting, finance, law, or management) often adopt narrow definitions th ...

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). Although institutional investors appear to be more sophisticated than retail investors, 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, due to 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 The Standard and Poor's 500, or simply the S&P 500, is a stock market index tracking the stock performance of 500 large companies listed on stock exchanges in the United States. It is one of the most commonly followed equity indices. As of D ...

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 financial crises in the early twenty-first century.

History

Ancient Rome and Islam

Honorific inscription Athens Louvre Ma156

Roman law ignored the concept of

juristic person A juridical person is a non-human legal person that is not a single natural person but an organization recognized by law as a fictitious person such as a corporation, government agency, NGO or International (inter-governmental) Organization (such ...

, yet at the time the practice of private

evergetism Euergetism (or evergetism, from the Greek , "do good deeds") was the ancient practice of high-status and wealthy individuals in society distributing part of their wealth to the community. This practice was also part of the patron-client relatio ...

(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 Aqueduct may refer to: Structures *Aqueduct (bridge), a bridge to convey water over an obstacle, such as a ravine or valley *Navigable aqueduct, or water bridge, a structure to carry navigable waterway canals over other rivers, valleys, railw ...

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 based on the life and teachings of Jesus of Nazareth. It is the world's largest and most widespread religion with roughly 2.38 billion followers representing one-third of the global pop ...

. The concept then might have been adopted by the emerging Islamic law. The

waqf A waqf ( ar, وَقْف; ), also known as hubous () or '' mortmain'' property is an inalienable charitable endowment under Islamic law. It typically involves donating a building, plot of land or other assets for Muslim religious or charitabl ...

(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 A tontine () is an investment linked to a living person which provides an income for as long as that person is alive. Such schemes originated as plans for governments to raise capital in the 17th century and became relatively widespread in the 18 ...

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 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 friend ...

s under Rule 506 of Regulation D as "

accredited investor An accredited or sophisticated investor is an investor with a special status under financial regulation laws. The definition of an accredited investor (if any), and the consequences of being classified as such, vary between countries. Generally, acc ...

s". 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.

Life cycle

Institutional investors investment horizons' differ, but do not share 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. Therefore, 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 less liquid assets such as private equities,

s or

commodities In economics, a commodity is an economic good, usually a resource, that has full or substantial fungibility: that is, the market treats instances of the good as equivalent or nearly so with no regard to who produced them. The price of a comm ...

. Finally, other institutions have an extended investment horizon, allowing them to invest in illiquid assets as they are unlikely to be forced to sell them before term.

Institutional-investor types

Asset manager Asset management is a systematic approach to the governance and realization of value from the things that a group or entity is responsible for, over their whole life cycles. It may apply both to tangible assets (physical objects such as buildings ...

Bank A bank is a financial institution that accepts 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 markets. Because ...

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 of ...

Foundation Foundation may refer to: * Foundation (nonprofit), a type of charitable organization ** Foundation (United States law), a type of charitable organization in the U.S. ** Private foundation, a charitable organization that, while serving a good cause ...

Hedge fund A hedge fund is a pooled investment fund that trades in relatively liquid assets and is able to make extensive use of more complex trading, portfolio-construction, and risk management techniques in an attempt to improve performance, such as sho ...

Insurance company Insurance is a means of protection from financial loss in which, in exchange for a fee, a party agrees to compensate another party in the event of a certain loss, damage, or injury. It is a form of risk management, primarily used to hedge ...

Investment company An investment company is a financial institution principally engaged in holding, managing and investing securities. These companies in the United States are regulated by the U.S. Securities and Exchange Commission and must be registered under the ...

Investment trust An investment trust is a form of investment fund found mostly in the United Kingdom and Japan. Investment trusts are constituted as public limited companies and are therefore closed ended since the fund managers cannot redeem or create shares. ...

Mutual fund A mutual fund is a professionally managed 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 i ...

Pension fund A pension fund, also known as a superannuation fund in some countries, is any plan, fund, or scheme which provides retirement income. Pension funds typically have large amounts of money to invest and are the major investors in listed and priva ...

Sovereign wealth fund A sovereign wealth fund (SWF), sovereign investment fund, or social wealth fund is a state-owned investment fund that invests in real and financial assets such as stocks, bonds, real estate, precious metals, or in alternative investments such ...

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 In U.S. financial law, a unit investment trust (UIT) is an investment product offering a fixed (unmanaged) portfolio of securities having a definite life. Unlike open-end and closed-end investment companies, a UIT has no board of directors. A UI ...

Family offices A family office is a privately held company that handles investment management and wealth management for a wealthy family, generally one with at least $50-$100 million in investable assets, with the goal being to effectively grow and transfer ...

Regional

In various countries different types of institutional investors may be more important. In oil-exporting countries

s are very important, while in

developed countries A developed country (or industrialized country, high-income country, more economically developed country (MEDC), advanced country) is a sovereign state that has a high quality of life, developed economy and advanced technological infrastruct ...

s may be more important.

Canada

Some examples of important Canadian institutional investors are: * Canada Pension Plan Investment Board ( C$420.4 Billion

019 Nineteen or 19 may refer to: * 19 (number), the natural number following 18 and preceding 20 * one of the years 19 BC, AD 19, 1919, 2019 Films * ''19'' (film), a 2001 Japanese film * ''Nineteen'' (film), a 1987 science fiction film Music ...

Caisse de dépôt et placement du Québec Caisse de dépôt et placement du Québec (CDPQ; ) is an institutional investor that manages several public and parapublic pension plans and insurance programs in Quebec. CDPQ was founded in 1965 by an act of the National Assembly, under the go ...

(C$340.1 Billion

Ontario Teachers' Pension Plan The Ontario Teachers' Pension Plan Board (french: Régime de retraite des enseignantes et des enseignants de l'Ontario) is an independent organization responsible for administering defined-benefit pensions for school teachers of the Canadian pr ...

(C$207.4 Billion

* British Columbia Investment Management Corporation (C$153.4 Billion

OMERS The Ontario Municipal Employees Retirement System (OMERS) is a Canadian public pension fund, headquartered in Toronto, Ontario. OMERS is a defined benefit, jointly sponsored, multi-employer public pension plan created in 1962 by Ontario provinc ...

Ontario Municipal Employees Retirement System((C$105 Billion) * Healthcare of Ontario Pension Plan ((C$100 Billion) *

Alberta Investment Management Alberta Investment Management Corporation (AIMCo) is an Albertan Crown corporation and institutional investor established to manage several public funds and pensions headquartered in Edmonton, Alberta. AIMCo was established by an act of the Le ...

(C$118.8 Billion

* 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 Railway The Canadian Pacific Railway (french: Chemin de fer Canadien Pacifique) , also known simply as CPR or Canadian Pacific and formerly as CP Rail (1968–1996), is a Canadian Class I railway incorporated in 1881. The railway is owned by Canadi ...

(C$14.3 Billion) *

Canadian National Railway The Canadian National Railway Company (french: Compagnie des chemins de fer nationaux du Canada) is a Canadian Class I freight railway headquartered in Montreal, Quebec, which serves Canada and the Midwestern and Southern United States. CN i ...

(C$19.4 Billion)

China

China's program to allow institutional investors to invest in its capital market is called

Qualified Foreign Institutional Investor The Qualified Foreign Institutional Investor () program, one of the first efforts to internationalize the RMB, represents China's effort to allow, on a selective basis, global institutional investors to invest in its RMB denominated capital market ...

(QWFII).

India

In India, the term Foreign Institutional Investor (FII) is used to refer to foreign companies investing in India's capital markets. Recently Foreign Institutional Investors (FII) has invested a total of $23 billion in the Indian market under this. With this,

Foreign-exchange reserves of India India has large foreign-exchange reserves; holdings of cash, bank deposits, bonds, and other financial assets denominated in currencies other than India's national currency, the Indian rupee. The reserves are managed by the Reserve Bank of In ...

have reached a total of $ 584 Billion and it has become a new record in the Indian market. Also called

Foreign direct investment A foreign direct investment (FDI) is an investment in the form of a controlling ownership in a business in one country by an entity based in another country. It is thus distinguished from a foreign portfolio investment by a notion of direct co ...

or FDI, statutory agencies in India like

SEBI The Securities and Exchange Board of India (SEBI) is the regulatory body for securities and commodity market in India under the ownership of Ministry of Finance within the Government of India. It was established on 12 April 1988 as an executive ...

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.

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 , or GPIF, is an incorporated administrative agency (an independent administrative institution), established by the Japanese government. It is the largest pool of retirement savings in the world. Japan's GPIF is the largest public fund investor ...

( $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 is a city, ceremonial county and local government district that contains the historic centre and constitutes, alongside Canary Wharf, the primary central business district (CBD) of London. It constituted most of London fr ...

'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 The Alaska Permanent Fund (APF) is a constitutionally established permanent fund managed by a state-owned corporation, the Alaska Permanent Fund Corporation (APFC). It was established in Alaska in 1976 by Article 9, Section 15 of the Alaska Stat ...

($73 Billion 021 *

Ensign Peak Advisors Ensign Peak Advisors (EP) ( ) is the investment manager for assets of the Church of Jesus Christ of Latter-day Saints (LDS Church).Lovett, Ian; Levy, Rachael"The Mormon Church Amassed $100 Billion. It Was the Best-Kept Secret in the Investment Wo ...

($100 Billion

CalPERS The California Public Employees' Retirement System (CalPERS) is an agency in the California executive branch that "manages pension and health benefits for more than 1.5 million California public employees, retirees, and their families".CalPERSFac ...

($389 Billion 020 *

CalSTRS The California State Teachers' Retirement System (CalSTRS) provides retirement, disability and survivor benefits for California's 965,000 prekindergarten through community college educators and their families. CalSTRS was established by law in 191 ...

($282 Billion 021 *

Harvard University endowment The Harvard University endowment (valued at $53.2 billion ) is the largest academic endowment in the world. Its value increased by over 10 billion dollars in fiscal year 2021, ending in the largest sum in its history. Along with Harvard's pension ...

($42 Billion 020 *

New York State Common Retirement The New York State Common Retirement fund is a public pension plan for the employees of New York State government. As of 2018, it is the third largest public pension plan in the nation, and holds $207.4 billion in assets. These assets are oversee ...

($248 Billion 020 * Princeton University endowment ($27 Billion 020 * Stanford University endowment ($30 Billion 020 *

Teacher Retirement System of Texas Teacher Retirement System of Texas (TRS) is a public pension plan of the State of Texas. Established in 1937, TRS provides retirement and related benefits for those employed by the public schools, colleges, and universities supported by the S ...

($165 Billion 020 *

Yale University endowment The Yale University endowment (valued at $42.3 billion as of 2021) is the world's second-largest university endowment and has a reputation as one of the best-performing investment portfolios in American higher education. The endowment was establish ...

($31 Billion 020 The major investor associations are: *Investment Management Association *

Association of British Insurers The 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 joined to form one trade associa ...

National Association of Pension Funds The Pensions and Lifetime Savings Association (formerly the National Association of Pension Funds) is a trade association for those involved in designing, operating, advising and investing in all aspects of workplace pensions. The Pensions and ...

* 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.

Notes

References

Articles *

AA Berle Adolf Augustus Berle Jr. (; January 29, 1895 – February 17, 1971) was an American lawyer, educator, writer, and diplomat. He was the author of '' The Modern Corporation and Private Property'', a groundbreaking work on corporate governance, a pro ...

, "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 QC, FBA (born 24 September 1944) is Allen & Overy Professor of Corporate Law Emeritus at the University of Oxford, Emeritus Fellow of Jesus College, Oxford and Emeritus Professor of Law at the London School of Economics, wher ...

, "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''Einer Elhauge Horizontal shareholding
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