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An institutional investor is an entity which pools money to purchase securities, real property, and other investment assets or originate loans. Institutional investors include banks, insurance companies, pensions, hedge funds, REITs, investment advisors, endowments, and mutual funds. Operating companies which invest excess capital in these types of assets may also be included in the term. Activist institutional investors may also influence corporate governance by exercising voting rights in their investments.
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. 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 financial crises in the early twenty-first century.
Ancient Rome and IslamEdit
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. 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).
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 shares allowing them to spread risk and become some of the earliest speculative institutions known in the West.
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.
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 are waived from needing to file with the security exchange commission.
Institutional investors as financial intermediariesEdit
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.
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 funds or commodities. 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.
In various countries different types of institutional investors may be more important. In oil-exporting countries sovereign wealth funds are very important, while in developed countries, pension funds may be more important.
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 ($1045.5 billion )
- Local Government Officials ($165 billion )
- Pension Fund Association ($117 billion )
The most important Canadian institutional investors are:
- Canada Pension Plan Investment Board (C$400.6 Billion )
- Caisse de dépôt et placement du Québec (C$248 Billion )
- Ontario Teachers' Pension Plan (C$171.4 Billion )
- British Columbia Investment Management (C$123.6 Billion [March 31, 2015])
- Alberta Investment Management (C$83.9 Billion [December 31, 2014])
In the UK, institutional investors may play a major role in economic affairs, and are highly concentrated in the City of London's square mile. Their wealth accounts for around two thirds of the equity in public listed companies. For any given company, the largest 25 investors would have to be able to muster over half of the votes.
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.
- Fichtner, Jan; Heemskerk, Eelke; Garcia-Bernardo, Javier (2017). "Hidden power of the Big Three? Passive index funds, re-concentration of corporate ownership, and new financial risk". Business and Politics. 19 (2): 298–326. doi:10.1017/bap.2017.6.
- Koh, Jae Myong (2018) Green Infrastructure Financing: Institutional Investors, PPPs and Bankable Projects, Palgrave Macmillan.
- N. Tran (2008) Les cités et le monde du travail urbain en Afrique romaine, in Le quotidien municipal dans l'Occident romain, M. Cébeillac-Gervasoni, C. Berrendonner and L. Lamoine (ed.), pp. 333–48.
- R. Biundo (2008) Acqua publica: propriété et gestion de l'eau dans l'économie des cités de l'Empire, in Le quotidien municipal dans l'Occident romain, M. Cébeillac-Gervasoni, C. Berrendonner and L. Lamoine (ed.), pp. 365–78
- J. Loiseau (2004) La Porte du vizir : programmes monumentaux et contrôle territorial au Caire à la fin du XIVe siècle. Histoire urbaine 9/1: 7–27.
- For an example ad absurdo: M. Lewis (oct. 2010) Beware of Greeks Bearing Bonds. Vanity Fair.
- Pullan, B. (1971) Rich and poor in Renaissance Venice. The Social Institutions of a Catholic State, to 1620. Oxford.
- Berger P. (1978) Rural Charity in Late Seventeenth Century France: The Pontchartrain Case. French Historical Studies, 10/3: 393–415.
- Gelderblom O. and J. Jonker (2007) With a view to hold. The emergence of institutional investors on the Amsterdam securities market during the 17th and 18th centuries. Utrecht University Working Papers (pdf)
- G. Clark and A. Clark (2001) Common Rights to Land in England, 1475–1839. The Journal of Economic History, 61/4: 1009–1036.
- Chen X., J. Harford and K. Li (2007) Monitoring: Which institutions matter?. Journal of Financial Economics, 86: 279–305.
- see Brian Cheffins, Company Law, Theory Structure and Operation (1997) Oxford University Press, pp.636 ff.
- The IMA is the result of a merger in 2002 between the Institutional Fund Managers Association and the Association of Unit Trusts and Investment Funds
- "Institutional Investor COMMittee". www.iicomm.org. Retrieved 23 February 2016.
- 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
- 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)