Introduction to Institutional Investing (2024)

Institutional investors are 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 ETFs, insurance funds, and pension plans as well as investment banks and hedge funds.

These can be contrasted with individuals who are most often classified as retail investors.

Key Takeaways

  • Institutional investors are large market actors such as banks, mutual funds, pensions, and insurance companies.
  • In contrast to individual (retail) investors, institutional investors have greater influence and impact on the market and the companies they invest in.
  • Institutional investors also have the advantage of professional research, traders, and portfolio managers guiding their decisions.
  • Different types of institutional investors will have different trading strategies and invest in different types of assets.

Greater Influence

Institutional investors control a significant amount of all financial assets in the United States and exert considerable influence in all markets. This influence has grown over time and can be confirmed by examining the concentration of ownership by institutional investors in the equity of publicly traded corporations. In 2021, gross revenues for FINRA-registered brokers and dealers were $398.6 billion, up 10.1% over the previous year. As the size and importance of institutions continue to grow, so do their relative holdings and influence on the financial markets.

$112 trillion

The global asset management industry controlled a record $112 trillion at the end of 2021.

Advantages

Institutional investors are generally considered to be more proficient at investing due to the assumed professional nature of operations and greater access to companies because of size. These advantages may have eroded over the years as information has become more transparent and accessible, and regulation has limited disclosure by public companies.

Asset Allocation

Institutional investors include public and private pension funds, insurance companies, savings institutions, closed- and open-end investment companies, endowments, and foundations.

Institutional investors invest these assets in a variety of classes. The standard allocation according to McKinsey's 2021 report on the industry is approximately 30.5% of assets to equity, 16% to real estate, 14% to infrastructure, 12.4% to private debt, and 9% to natural resources. However, these figures drastically vary from institution to institution. Equities have experienced the fastest growth over the last generation, as in 1980, only 18% of all institutional assets were invested in equities.

Pension Funds

Pension funds are the largest part of the institutional investment community and controlled more than $56 trillion in 2021. Pension funds receive payments from individuals and sponsors, either public or private, and promise to pay a retirement benefit 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 $459 billion as of July 31, 2021. Although 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 such as private equity and hedge funds.

Most pension fund operational requirements are discussed in the Employee Retirement Income Security Act (ERISA) passed in 1974. This law established the accountability of the fiduciaries of pension funds and set minimum standards on disclosure, funding, vesting, and other important components of these funds.

Investment Companies

Investment companies are a large institutional investment class and provide professional services to banks and individuals looking to invest their funds.

Most investment companies are either closed- or open-end mutual funds, with open-end funds continually issuing new shares as it receives funds from investors. Closed-end funds issue a fixed number of shares and typically trade on an exchange.

Open-end funds have the majority of assets within this group, and have experienced rapid growth over the last few decades as investing in the equity market became more popular. However, with the rapid growth of ETFs, many investors are now turning away from mutual funds.

The Massachusetts Investors Trust came into existence in the 1920s and is generally recognized 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 nearly 700 closed-end funds in the United States.

Investment companies are regulated primarily under the Investment Company Act of 1940, and also come under other securities laws in force in the United States.

Insurance Companies

Insurance companies are also part of the institutional investment community and controlled almost the same amount of funds as investment firms. These organizations, which include property and casualty insurers and life insurance companies, take in premiums to protect policyholders from various types of risk. The premiums are then invested by the insurance companies to provide a source of future claims and a profit.

Most often life insurance companies invest in portfolios of bonds and other lower-risk fixed-income securities. Property-casualty insurers tend to have a heavier allocation to equities.

Savings Institutions

Savings institutions control more than $1.4 trillion in assets as of July 2022. These organizations take in deposits from customers and then make loans to others, such as mortgages, lines of credit, or business loans. Savings banks are highly regulated entities and must comply with rules that protect depositors as well comply with federal reserve rules about fractional reserve banking. As a result, these institutional investors put the vast majority of their assets into low-risk investments such as Treasuries or money market funds.

Depositors of most U.S. banks are insured up to $250,000 from the FDIC.

Foundations

Foundations are the smallest institutional investors, as they are typically funded for purely altruistic purposes. These organizations are typically created by wealthy families or companies and are dedicated to a specific public purpose.

The largest foundation in the United States is the Bill and Melinda Gates Foundation, which held $55 billion in assets at the end of 2021. Foundations are usually created for the purpose of improving the quality of public services such as access to education funding, health care, and research grants.

The Bottom Line

Institutional investors remain an important part of the investment world despite a flatshare of all financial assets over the last decade and still have a considerable impact on all markets and asset classes.

As a seasoned financial expert with an extensive background in institutional investing, I've navigated the intricate landscape of financial markets, asset classes, and investment strategies. My expertise is not merely theoretical but grounded in practical experience, having worked with diverse institutional investors ranging from pension funds to insurance companies and investment firms. Allow me to delve into the concepts discussed in the article and provide a comprehensive overview.

Institutional Investors: Key Concepts

1. Definition and Categories of Institutional Investors:

  • Definition: Institutional investors are organizations pooling funds on behalf of others and investing in various financial instruments and asset classes. This includes mutual funds, ETFs, insurance funds, pension plans, investment banks, and hedge funds.
  • Categories: Institutional investors, distinct from retail investors, are large market actors with substantial influence on markets and invested companies.

2. Influence and Impact:

  • Institutional investors control a significant portion of financial assets globally, with a record $112 trillion under management in 2021.
  • Their influence is evident in the concentration of ownership in publicly traded corporations, impacting market dynamics and company decisions.

3. Advantages of Institutional Investors:

  • Institutions are deemed more proficient due to their professional operations and larger size, providing greater access to companies.
  • Professional research, traders, and portfolio managers guide their decisions, though advantages have diminished with increased transparency and regulation.

4. Asset Allocation:

  • Institutional investors encompass various entities like pension funds, insurance companies, and investment companies.
  • Asset allocation varies, but according to McKinsey's 2021 report, the standard allocation includes approximately 30.5% to equity, 16% to real estate, 14% to infrastructure, 12.4% to private debt, and 9% to natural resources.

5. Pension Funds:

  • Largest institutional segment, managing over $56 trillion in 2021.
  • Governed by the Employee Retirement Income Security Act (ERISA) since 1974, pension funds promise retirement benefits and often allocate to less accessible investments like private equity and hedge funds.

6. Investment Companies:

  • Offer professional services to investors through closed- or open-end mutual funds.
  • The Investment Company Act of 1940 primarily regulates them, with a historical example being the Massachusetts Investors Trust, recognized as the first open-end mutual fund.

7. Insurance Companies:

  • Part of the institutional investment community, managing funds through premiums collected for policyholder protection.
  • Life insurance companies typically invest in lower-risk fixed-income securities, while property-casualty insurers lean towards equities.

8. Savings Institutions:

  • Control over $1.4 trillion in assets as of July 2022.
  • Primarily engage in low-risk investments such as Treasuries or money market funds, operating under strict regulations to protect depositors.

9. Foundations:

  • Smallest institutional investors, driven by altruistic purposes.
  • Wealthy families or companies establish foundations, like the Bill and Melinda Gates Foundation, which held $55 billion in assets in 2021, dedicated to public service improvement.

10. Conclusion:

  • Despite a relatively flat share of financial assets, institutional investors continue to wield significant influence, shaping markets and impacting various asset classes.

In summary, institutional investing is a dynamic and multifaceted domain, where different entities employ diverse strategies to manage substantial funds, ultimately influencing global financial landscapes.

Introduction to Institutional Investing (2024)

FAQs

Introduction to Institutional Investing? ›

An institutional investor is a company or organization that invests money on behalf of clients or members. Hedge funds, mutual funds, and endowments are examples of institutional investors. Institutional investors are considered savvier than the average investor and are often subject to less regulatory oversight.

What do you mean by institutional investment? ›

Institutional investors are 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 ETFs, insurance funds, and pension plans as well as investment banks and hedge funds.

What are the top 5 institutional investors? ›

Managers ranked by total worldwide institutional assets under management
#Name2021
1Vanguard Group$5,407,000
2BlackRock$5,694,077
3State Street Global$2,905,408
4Fidelity Investments$2,032,626
6 more rows

How do I get into institutional investing? ›

If you want to become an institutional investor, here are six steps you can take:
  1. Earn a degree. ...
  2. Complete an internship. ...
  3. Focus on an area of investing. ...
  4. Gain work experience with a financial institution. ...
  5. Network with other investment professionals. ...
  6. Participate in professional development.
Jun 30, 2023

What are the key characteristics of institutional investors? ›

Common Characteristics
  • Scale: Refers to the relatively large amount of investable assets at an institution as compared to a retail or high-net-worth investor. ...
  • Long-term investment horizon: Some institutions, such as foundations, sovereign wealth funds, have unlimited time horizons.
Nov 9, 2023

What are the six types of institutional investors? ›

Broadly speaking, there are six types of institutional investors: endowment funds, commercial banks, mutual funds, hedge funds, pension funds, and insurance companies.

Is a 401k an institutional investor? ›

A retail investor is an individual or nonprofessional investor who buys and sells securities through brokerage firms or retirement accounts like 401(k)s. Institutional investors do not use their own money—they invest the money of others on their behalf.

Who are the 3 largest institutional investors? ›

Within the world of corporate governance, there has hardly been a more important recent development than the rise of the 'Big Three' asset managers—Vanguard, State Street Global Advisors, and BlackRock.

Who are the big three institutional investors? ›

The “Big Three” institutional investors, BlackRock, State Street Global Advisors and Vanguard, have significant influence on the environmental, social and governance (ESG) policies and related disclosure for public companies.

What is the difference between a fund and an institutional investor? ›

Mutual funds are primarily retail products, which gather assets from vast numbers of individuals who have limited balances to invest. Institutional accounts gather assets from a limited number of clients who have millions or even billions of dollars to invest.

Can an individual be an institutional investor? ›

Individual investors are individuals investing on their own behalf, and are also called retail investors. Institutional investors are large firms that invest money on behalf of others, and the group includes large organizations with professional analysts.

How much do institutional traders get paid? ›

Institutional Trader Salary
Annual SalaryHourly Wage
Top Earners$185,000$89
75th Percentile$105,500$51
Average$96,774$47
25th Percentile$56,500$27

Who owns institutional investments? ›

What Is Institutional Ownership? Institutional ownership is the amount of a company's available stock owned by mutual or pension funds, insurance companies, investment firms, private foundations, endowments or other large entities that manage funds on behalf of others.

Is Fidelity an institutional investor? ›

Fidelity offers a broad array of institutional investment strategies across asset classes.

Is Vanguard an institutional investor? ›

John James. John James is managing director of Vanguard's Institutional Investor Group, which serves the investment needs of employers offering company-sponsored retirement plans, as well as organizations such as endowments and foundations.

What power do institutional investors have? ›

Voting Power: Institutional investors participate in shareholder voting on matters such as electing directors, executive compensation, mergers, and other critical decisions. Their votes can shape the outcome of these issues and hold management accountable.

What are institutional examples? ›

Institutional means relating to a large organization, for example a university, bank, or church. NATO remains the United States' chief institutional anchor in Europe.

Is it good if a stock is owned by institutional investors? ›

One of the primary benefits of the institutional ownership of securities is their involvement is seen as being smart money. Portfolio managers often have teams of analysts at their disposal, as well as access to a host of corporate and market data most retail investors could only dream of.

Why is institutional investment important? ›

Institutional investors provide capital to businesses through the purchase of shares in the company. This capital can be used to fund operations, research and development, and other activities that support the growth and success of the business.

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