Institutional Investing Explained

What is an institutional investor? Why should you even care?

The financial markets have complex forces working within them that can affect your investment profits. Institutional investing is one of these forces. Read on to find out how they can affect nearly any investment you may be considering.

Institutional investors are business entities that invest large sums of money by pooling the resources of large numbers of people. This would include insurance companies, mutual funds, pension funds, and more.

Institutional investors have huge holdings and exert a lot of influence on all the financial markets. This alone is a good enough reason to understand what’s going on. Institutional investors own over 65% of the stock shares of the largest 50 publicly traded companies in the United States. This number has increased every year and is expected to continue to grow.

Institutional investors control over $25 trillion in the market place. This is over 17% of all the financial assets in the country. On the average, these monies are roughly distributed in 40% stock, 40% bonds and other fixed income securities, and the remaining 20% in other areas (cash, real estate, and more).

Types of Institutional Investors

1. Pension Funds are the largest portion of these monies (over $10 trillion). The California Public Employees’ Retirement System accounts for over $239 billion alone! As you may know, pension funds receive payments from individuals and pay a retirement benefit at some point in the future.

• Pension funds are heavily regulated, but do have some freedom to invest in riskier investments. The large holdings can have significant effects on the price of investments in the market place. They have 40% of all institutional assets.

2. Investment companies / mutual funds are the next largest group of institutional investors. These groups account for almost 30% of all institutional assets. This 30% is a huge a gain from the 2.9% in 1980 and 9.4% in 1990.

• The majority of these monies are invested in open-end mutual funds. While these companies do have constraints placed upon them (for example, they can only have a relatively small portion of their assets in any single investment), they can have a huge impact on the financial markets with their considerable bankrolls.

3. Insurance companies are the third largest type of institutional investor. The premiums that are collected are invested to generate both profit and income to pay future insurance claims. In many years, insurance companies’ only income is from their investments. The amount collected in premiums is often about the same as the amount paid out in claims.

4. Banks and other savings institutions are the rapidly declining group, from 32.6% in 1980 to 4.9% in 2009. The total assets are approximately $1 trillion. Banks take advantage of the fact that not everyone wants to withdraw all their money at the same time. They take your deposits and invest them as well as make loans with them.

5. Various foundations are the last group of institutional investors. These are usually non-profits created to serve the public in some way. The largest foundation in the United States is the Bill and Melinda Gates Foundation with holdings of $36.7 billion. That’s certainly nothing to sneeze at but it’s tiny compared to the bigger institutional investors.

• Foundations are typically too small to have any significant effect on the marketplace.

So there are several types of institutional investors that have the ability to affect the financial market place. Imagine a pension fund with over $100 billion buying a large amount of a given stock; the price will most certainly rise significantly.

Likewise, when they choose to sell, the price is going to drop when the shares are made available in the marketplace.

So keep an eye on these types of investors as you make investment decisions. If a financial instrument in which you’re invested captures their attention, the price could fluctuate rapidly – maybe for the better, maybe for the worse.