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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 Land improvement, improvements or Fixture (property ...
, and other investment assets or originate loans. Institutional investors include
commercial bank A commercial bank is a financial institution which accepts deposit (finance), deposits from the public and gives loans for the purposes of consumption and investment to make profit (economics), profit. It can also refer to a bank, or a division ...
s,
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 bank, commercial banking system. In contrast to a commercial ba ...
s,
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 ...
s, government-linked companies, insurers,
pension fund A pension fund, also known as a superannuation fund in some countries, is any plan, fund, or scheme which provides pension, retirement income. Pension funds typically have large amounts of money to invest and are the major investors in listed a ...
s,
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, Bond (finance), bonds, real estate, precious metals, or in alternative inve ...
s,
charities A charitable organization or charity is an organization whose primary objectives are philanthropy and social well-being (e.g. educational, Religion, religious or other activities serving the public interest or common good). The legal definitio ...
,
hedge fund A hedge fund is a pooled investment fund that trades in relatively Market liquidity, liquid assets and is able to make extensive use of more complex trader (finance), trading, portfolio (finance), portfolio-construction, and risk management techn ...
s,
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 building, office and apartment buildings, warehouses, hospital ...
s, investment advisors, endowments, and
mutual fund A mutual fund is a professionally managed 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 ...
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 change, social, Political campaign, political, economic or Natural environment, environmental reform with the desire to make Social change, changes i ...
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 Accounting, also known as accountancy, is the measuremen ...
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 In finance Finance is the study and discipline of money, currency and capital assets. It is related to, but not synonymous with economics, the study of Produ ...
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

Roman law ignored the concept of
juristic person A juridical person is a non-human legal person that is not a Natural person, single natural person but an organization recognized by law as a fictitious person such as a corporation, government agency, NGO or International (inter-governmental) Org ...
, 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 religions, Abrahamic Monotheism, monotheistic religion based on the Life of Jesus in the New Testament, life and Teachings of Jesus, teachings of Jesus, Jesus of Nazareth. It is the Major religious groups, world's ...
. 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 Alienation (property law), inalienable charitable financial endowment, endowment under Sharia, Islamic law. It typically involves donating a building, plot of ...
(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 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.


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,
hedge fund A hedge fund is a pooled investment fund that trades in relatively Market liquidity, liquid assets and is able to make extensive use of more complex trader (finance), trading, portfolio (finance), portfolio-construction, and risk management techn ...
s or
commodities In economics, a commodity is an economic goods, good, usually a resource, that has full or substantial fungibility: that is, the Market (economics), market treats instances of the good as equivalent or nearly so with no regard to who Production ...
. 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 *
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. Beca ...
*
Endowment fund A financial endowment is a legal structure for managing, and in many cases indefinitely perpetuating, a pool of Financial instrument, financial, real estate, or other investments for a specific purpose according to Donor intent, the will of its fou ...
* Foundation *
Hedge fund A hedge fund is a pooled investment fund that trades in relatively Market liquidity, liquid assets and is able to make extensive use of more complex trader (finance), trading, portfolio (finance), portfolio-construction, and risk management techn ...
*
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 * Investment trust *
Mutual fund A mutual fund is a professionally managed 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 ...
*
Pension fund A pension fund, also known as a superannuation fund in some countries, is any plan, fund, or scheme which provides pension, retirement income. Pension funds typically have large amounts of money to invest and are the major investors in listed a ...
*
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, Bond (finance), bonds, real estate, precious metals, or in alternative inve ...
*
Unit trust A unit trust is a form of Collective investment scheme, collective investment constituted under a Trust (law), 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 ...
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), sovereign investment fund, or social wealth 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 inve ...
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 ...
,
pension fund A pension fund, also known as a superannuation fund in some countries, is any plan, fund, or scheme which provides pension, retirement income. Pension funds typically have large amounts of money to invest and are the major investors in listed a ...
s may be more important.


Canada

Some examples of important Canadian institutional investors are: *
Canada Pension Plan Investment Board The Canada Pension Plan Investment Board (CPPIB; french: Office d'investissement du régime de pensions du Canada), operating as CPP Investments (french: Investissements RPC), is a Canadian Crown corporations of Canada, Crown corporation establi ...
( C$420.4 Billion 019 * Caisse de dépôt et placement du Québec (C$340.1 Billion 019 *
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 pension plan, defined-benefit pensions for schoo ...
(C$207.4 Billion 019 * British Columbia Investment Management Corporation (C$153.4 Billion 019 *
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 provinci ...
Ontario Municipal Employees Retirement System((C$105  Billion) * Healthcare of Ontario Pension Plan ((C$100  Billion) * Alberta Investment Management (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 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 railroad, Class I freight railway headquartered in Montreal, Quebec, which serves Canada and the Midwestern United States, M ...
(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 Foreign Institutional Investors (FII) has 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 A foreign direct investment (FDI) is an investment in the form of a Controlling interest, 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 ...
or FDI, statutory agencies in India like
SEBI The Securities and Exchange Board of India (SEBI) is the Regulatory agency, regulatory body for securities and commodity market in India under the ownership of Ministry of Finance (India), Ministry of Finance within the Government of India. It w ...
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 ( $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 status in the United Kingdom, city, Ceremonial counties of England, ceremonial county and local government district that contains the historic centre and constitutes, alongside Canary Wharf, the primary central bu ...
'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 endowment ($27 Billion 020 * Stanford University endowment ($30 Billion 020 * Teacher Retirement System of Texas ($165 Billion 020 * Yale University endowment ($31 Billion 020 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 is the professional asset management of various Security (finance), securities, including shareholdings, Bond (finance), bonds, and other assets, such as real estate, to meet specified investment goals for the benefit of inv ...
* List of institutional investors in the United Kingdom *
Private placement Private placement (or non-public offering) is a securities offering, funding round of security (finance), securities which are sold not through a public offering, but rather through a private offering, mostly to a small number of chosen investors. ...


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, "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
{{DEFAULTSORT:Institutional Investor Investment