Institutional investment is an investment by institutional investors organizations that pool together funds on behalf of others and invest those funds in a variety of different financial instruments and asset classes. They include investment funds like mutual funds and Exchange-traded funds, insurance funds, and pension plans as well as investment banks and hedge funds. These can be compared with individuals who are often classified as retail investors.
Institutional investors control an important amount of all financial assets in the U.S. and exert considerable influence in all markets. This influence has developed over time and can be confirmed by examining the concentration of ownership by institutional investors in the equity of publicly traded corporations. About 80% of equity market capitalization is owned by Institutional investors. As the size and significance of institutions continue to grow, so do their relative holdings and influence on the financial markets. fintech news
According to McKinsey estimates, the asset management industry of the North American controlled over $88.5 trillion at the end of 2017.
Institutional investors incorporate public and private pension funds, savings institutions, insurance companies, closed and open-end investment companies, endowments and foundations.
Institutional investors invest these assets in an assortment of classes. The standard allocation as per McKinsey’s 2017 report on the industry is approximately 40% of assets to equity and 40% to fixed income. Another 20% of total assets were allocated to alternative investments such as private equity, real estate, cash, hedge funds, and other areas. However, these figures vary drastically from institution to institution. Equities have experienced the fastest growth in the course of the last generation, and in 1980 only 18% of all institutional assets were invested into equities.
Pension funds are the largest part of the institutional investment community and controlled over $41 trillion in early 2018. Pension funds get payments from individuals and sponsors, either public or private, and promise to pay a retirement benefit later in the future to the beneficiaries of the fund.
The large pension fund in the United States, California Public Employees’ Retirement System (CalPERS), reported total assets of more than $351 billion as of Feb. 6, 2019. In spite of the fact that pension funds have significant risk and liquidity constraints, they are often able to allocate a small portion of their portfolios to investments that are not easily accessible to retail investors like private equity and hedge funds. Payments News
Most pension fund operational requirements are discussed in the ERISA (Employee Retirement Income Security Act) Passed in 1974. This law sets up the accountability of the fiduciaries of pension funds and set minimum standards on disclosure, vesting, funding, and other significant components of these funds.
Investment organizations are the second-largest institutional investment class and give professional services to banks and people hoping to invest their funds.
Most investment companies are either closed or open-end mutual funds, with open-end funds consistently issuing new shares as it receives funds from investors. Closed-end funds issue a fixed number of shares and normally trade on an exchange.
Open-end funds have the most of the assets inside this group, and have experienced rapid growth throughout the last few decades as investing in the equity market became more popular. However, with the rapid growth of ETFs, numerous investors are currently turning away from mutual funds.
The Massachusetts Investors Trust came into existence in the 1920s and is commonly perceived as the first open-end mutual fund to operate in the United States. Others quickly followed, and by 1929 there were 19 more open-end mutual funds and about 700 closed-end funds in the U.S.
Investment companies are regulated primarily under the Investment Company Act of 1940, and also come under different securities laws in force in the U.S.
Insurance companies are also part of the institutional investment community and controlled nearly the same amount of funds as investment firms. These associations, which incorporate property and casualty insurers and life insurance companies, take in premiums to protect policyholders from different types of risk. The premiums are then invested by the insurance agencies to provide a source of future claims and a profit.
Most often life insurance organizations invest in portfolios of bonds and other lower-risk fixed-income securities. Property-casualty insurers tend to in general have a heavier allocation to equities.
Savings institutions control over $1 trillion in assets. These organizations take in deposits from customers and then make loans to others, like mortgages, lines of credit, or business loans. Savings banks are exceptionally regulated entities and must comply with rules that secure depositors as well as comply with federal reserve rules about fractional reserve banking. As a result, these institutional investors put by far most of their assets into low-risk investments such as Treasuries or money market funds.
Foundations are the smallest institutional investors, as they are normally funded for purely altruistic purposes. These organizations are generally created by wealthy families or organizations and are committed to a specific public purpose.
The largest foundation in the United States is the Bill and Melinda Gates Foundation, which held $50.7 billion in assets toward the end of 2018. Foundations are usually established for the purpose of improving the quality of public services such as access to health care, education funding, and research grants.
Institutional investors are generally considered to be more proficient at investing because of the assumed professional nature of operations and greater access to companies because of size. These favorable circumstances may have dissolved over the years as information has become more accessible and transparent, and regulation has restricted disclosure by public companies.
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