Who Are Institutional Investors?

Comments

• msf

  December 2018

  "institutional investors are nonbank organizations ... there are six types of institutional investors ... Commercial banks"
  
  Uh huh. In addition to commercial banks, there are also investment banks like Goldman Sachs. Aside from mutual funds, the type of institutional investor very familiar to people here are brokerages that give you access to institutional class shares via omnibus accounts.
• Old_Joe

  December 2018

  And then there's this: An excerpt from the current edition of The Economist:
  
  "Think of the upper echelons of the money-management business, and the image that springs to mind is of fusty private banks in Geneva or London’s Mayfair, with marble lobbies and fake country-house meeting-rooms designed to make their super-rich clients feel at home. But that picture is out of date. A more accurate one would feature hundreds of glassy private offices in California and Singapore that invest in Canadian bonds, European property and Chinese startups—and whose gilded patrons are sleepwalking into a political storm."
  
  "Global finance is being transformed as billionaires get richer and cut out the middlemen by creating their own “family offices”, personal investment firms that roam global markets looking for opportunities. Largely unnoticed, family offices have become a force in investing, with up to $4trn of assets—more than hedge funds and equivalent to 6% of the value of the world’s stockmarkets. As they grow even bigger in an era of populism, family offices are destined to face uncomfortable questions about how they concentrate power and feed inequality."
  
  (Bold emphasis added.)
• fundalarm

  December 2018

  Goldman Sachs is not an institutional investor. Goldman Sachs Asset Management that buys and sells on behalf of their funds IS. Prop desk, investment banking or capital markets are NOT institutional investors. Commercial banks only fit the category when they buy treasuries or other IG bonds for their balance sheet.
  
  Brokerage firms are not investors either. They handle orders from a retail or institutional investor. A bank holding company can have a brokerage (sell side) and an asset manager (buy side). Only buy side qualifies as an investor. I know it's confusing. Goldmans and others also have a deposit taking business, lending business, merchant banking, etc, none of which qualify. Only Goldman's mutual and hedge funds qualify.
  
  So if a manager of a target day fund series in one's workplace 401k (and across all other 401k that use the same TDF selection) decide, for instance to drastically reduce risk, then they have the ability to move the markets if they do it in a hurry.
  
  

  msf said:

  "institutional investors are nonbank organizations ... there are six types of institutional investors ... Commercial banks"
  
  Uh huh. In addition to commercial banks, there are also investment banks like Goldman Sachs. Aside from mutual funds, the type of institutional investor very familiar to people here are brokerages that give you access to institutional class shares via omnibus accounts.
• msf

  December 2018

  fundalarm said:

  Commercial banks only fit the category [of institutional investors] when they buy treasuries or other IG bonds for their balance sheet.

  So you too are disagreeing with the cited page. It says that "institutional investors ... buy and sell securities on behalf of their members." Not on their own behalf for their own balance sheets.
  
  Then there's the Financial Times definition that is more inclusive:

  A financial institution, such as a bank, pension fund, mutual fund and insurance company, that invests large amounts of money in securities, commodities and foreign exchange markets, on its own behalf or on the behalf of its customers.

  fundalarm said:

  Only buy side qualifies as an investor. I know it's confusing.

  Yes it's confusing because (a) this is more a simple rule of thumb than an inviolate requirement and (b) because there's rarely a clean dichotomy between buy side and sell side. From a then (2013) SEC commissioner:

  Market participants are often described as either “buy-side” or “sell-side”. Buy-side firms, like asset managers, buy financial products and services; while sell-side firms, like broker-dealers and investment banks, create and sell those products and services. When viewed in these simple terms, institutional investors are generally considered to be on the buy-side. However, mutual fund and asset management companies can also act like sell-siders when they market their own pooled-vehicles, whether directly or through broker-dealers.

  One way of viewing institutional investors is any entity with enough heft and buying discretion to move markets. That's the view you expressed: "they have the ability to move the markets", and the view echoed in part of the cited article "Due to the size of their holdings, institutions exert the largest impact on the financial markets."
  
  Another way of viewing institutional investors is more structural, focusing on the form rather than the impact (even if the former is used as a proxy for the latter). Thus mutual funds like CVLEX are considered institutional investors, despite the reality that with $50M AUM invested in large cap equities such funds won't move markets even "if they do it in a hurry."
  
  Here's a little exercise: which of these is an institutional investor: traditional pension plan, defined contribution pension plan, individual retirement account?
  
  I'd like to think you'd call the first an institutional investor and the third not. What about the DC plan? Structurally, legally, it is a pension plan. Here's a CFA Institute piece classifying DC plans (section 2.2.1.1) under pension plans (section 2.2.1) which in turn fall under institutional investors (section 2.2).
  
  Yet a 401k plan has no discretion in allocating assets among the investments offered (which may include brokerage gateways, leaving the choice of investments wide open). In terms of market impact, it's very much like a thousand distinct IRAs. Form and heft but without discretion to move that heft in one motion, little impact.
  
  You offered one perspective. The cited article offered several, sometimes conflicting, perspectives. I'll wrap this up with a quote from an OECD paper:

  There is no simple definition of an “institutional investor”. The closest we get to a common characteristic is that institutional investors are not physical persons. Instead they are organised as legal entities.

  Institutional Investors as Owners: Who Are They and What Do They Do?
  
  
• fundalarm

  December 2018

  DC plans are institutional investors.