Who’re they: Institutional investors are organizations or companies that put money into making a profit. There are various institutional investors in financial markets. Examples include banks, insurance companies, pension funds, foundations, investment companies, and endowments. They collect funds from various sources, such as savings, premium contributions, and charitable donations. They then invest the funds to earn income while covering liabilities. Some also invest on behalf of their clients, which can come from individuals, organizations, and companies. So, for example, when we buy a mutual fund, we benefit from their services, in this case, an investment manager at an investment company.
Unlike individual investors, institutional investors manage large funds. They also differ in terms of risk tolerance and investment horizon. Some have long-term horizons with a high-risk tolerance. Meanwhile, others have short-term horizons with low-risk tolerance.
For example, a bank has a low-risk tolerance. They invest in instruments such as government bonds to generate stable and predictable returns. They leverage their short-term liquidity to generate returns, which can support their main business – lending and sustain their profitability.
Who are institutional investors in financial markets?
Institutional investors in financial markets can be pension funds, banks, foundations, insurance companies, and investment companies. Who are the biggest global institutional investors in financial markets? Citing Institutional Investors, the top 20 institutional investors managed approximately $11 trillion in assets in 2019, including:
- Government Pension Investment Fund: $1,555.6 billion
- Government Pension Fund: $1,066.4 billion
- China Investment Corporation: $940.6 billion
- National Pension: $637.3 billion
- Federal Retirement Thrift: $601.0 billion
- Abu Dhabi Investment Authority: $579.6 billion
- Kuwait Investment Authority: $533.7 billion
- Hong Kong Monetary Authority Investment Portfolio: $528.1 billion
- ABP: $523.3 billion
- SAMA Foreign Holdings: $509.9 billion
Pension funds provide essential services and help us deal with post-retirement uncertainties by providing a stable income. They raise funds from the participant’s contributions, which can be individuals or organizations. They then invest it across different asset classes to earn returns while meeting obligations. What are their obligations? They pay future retirement benefits to the beneficiaries.
Pension funds are long-term investors. They match cash inflows from programs and investments with payments to pension beneficiaries. They seek to pursue returns without interfering with their obligations.
Pension funds have different income targets, depending on their program. For example, mature funds typically target high investment returns as the beneficiary approaches retirement age. So the contribution becomes small relative to the obligation to pay benefits to them. The opposite applies to young or growing funds.
What are the largest public pension funds in the world? Here are the largest public pension funds in the world based on their total assets:
- Social Security Trust Funds: $2.838,2 billion
- Government Pension Investment Fund Japan: $1.445,1 billion
- Caisse des Dépôts: $1.112,4 billion
- Military Retirement Fund: $979,4 billion
- Federal Retirement Thrift Investment Board: $782,3 billion
- Federal Employees Retirement System: $733,8 billion
- National Pension Service of Korea: $679,9 billion
- Stichting Pensioenfonds ABP: $540,3 billion
- Zenkyoren: $530,3 billion
- Canada Pension Plan Investment Board: $518,4 billion
Foundations and endowments
Foundations and endowments raise funds from charitable donations from individuals, families, or companies. They use it to support research, teaching, education, or other programs. While foundations may have more discretion about where they spend their money, endowments usually fund one specific cause, such as a scholarship.
Foundations and endowments invest their funds to finance their programs. They usually aim to keep their capital from being eroded by inflation while generating income to fund programs and grants aligned with their goals. Moreover, unlike commercial investments by institutional investors in financial markets, foundations usually introduce impact investments. They invest in supporting their programs to generate positive social and environmental impacts.
What are the top 10 foundations with the largest endowments? Here is the list:
- Novo Nordisk Foundation: $69.6 billion
- Bill & Melinda Gates Foundation: $51.9 billion
- Wellcome Trust: $46.2 billion
- Stichting INGKA Foundation: $38.8 billion
- Mastercard Foundation: $31.5 billion
- Howard Hughes Medical Institute: $27.1 billion
- Azim Premji Foundation: $21 billion
- Open Society Foundations: $19.6 billion
- Lilly Endowment: $15.1 billion
- Ford Foundation: $13.7 billion
Banks are among institutional investors in financial markets. They collect money from the public, whether individuals, organizations, companies, or governments. Then, they channel it as a loan. In addition, they hold some in reserve, according to central bank rules. Such reserves should be sufficient to meet short-term liquidity needs when depositors withdraw their funds.
Banks usually invest their reserves to earn returns. They aim to earn a higher return than the interest paid to depositors. So, they take the difference as a profit.
Due to the above characteristics, banks usually have a short-term investment horizon. . They invest to earn income while matching assets and liabilities. In addition, their investments are liquid, so they are available to meet obligations when depositors withdraw funds.
Who are the biggest banks in the world? Here are the top 10 banks based on their total assets:
- China Industrial and Commercial Bank of China Limited: 5,866.00 billion
- China China Construction Bank: 4,532.05 billion
- China Agricultural Bank of China: 4,354.56 billion
- China Bank of China: 4,113.36 billion
- United States JPMorgan Chase: 3,954.68 billion
- Japan Mitsubishi UFJ Financial Group: 3,737.31 billion
- United Kingdom HSBC: 2,958.15 billion
- United States Bank of America: 2,434.08 billion
- France BNP Paribas: 2,429.26 billion
- France Crédit Agricole: 2,256.72 billion
Insurance companies collect funds from the premiums paid by the insured. They use it partly to cover claims and partly as reserves, which they use to meet future claims.
Insurance companies invest premiums collected until they are needed to pay claims. Thus, their investments serve two purposes: to generate returns to achieve profits and to meet claims as they fall due. Long story short, as long as the claim has not been paid, they will invest the premium to earn investment income.
Insurance companies usually invest in low-volatility securities. They generally allocate their investments mostly in highly rated fixed-income securities, which allows them to earn stable and predictable returns.
Risk tolerance and investment horizon usually differ between non-life insurance and life insurance. For example, life insurance usually has a longer time horizon than non-life insurance because liability claims usually arise after a longer period. Say we buy life insurance and pay regular premiums. The life insurance company will pay the death benefit to our heirs upon our death.
On the other hand, claims in the non-life insurance business can occur at any time. For example, we file a vehicle insurance claim because of an accident. When did the accident happen? Again, it can happen at any time. Therefore, they must have liquidity available at any time to pay claims.
Who are the largest insurance companies in the world? Here are the Top-10 insurance companies based on their written net premiums:
- UnitedHealth Group Incorporated: $201.48 billion
- Ping An Ins (Group) Co of China Ltd.: $118.75 billion
- China Life Insurance (Group) Company: $111.16 billion
- Centene Corporation: $107.37 billion
- Anthem, Inc.: $105.73 billion
- Kaiser Foundation Group of Health Plans (2): $102.93 billion
- AXA S.A.: $101.31 billion
- Allianz SE: $93.65 billion
- People’s Ins Co (Group) of China Ltd: $79.57 billion
- Assicurazioni Generali S.p.A.: $79.19 billion
Unlike other institutional investors in financial markets, investment companies manage, sell, and market investment products to the public. They may be privately or publicly owned. They may issue securities such as mutual funds. Or, they invest in securities and act on behalf of the client.
In general, investment companies are divided into three types, including:
- An open-end investment company or funds
- A closed-end investment company or funds
- Unit investment trusts (IUT)
An open-end investment company manages mutual funds. They mix the portfolio into a mutual fund and sell it to investors. Thus, when we buy a mutual fund, we are essentially buying a portfolio that may contain various securities, including stocks, bonds, and money market instruments. Exchange-traded funds (ETFs) – mutual funds but traded on an exchange, much like stocks – are usually also structured as open-end funds.
Closed-end funds sell several shares in an initial public offering to raise funds. They then invest the funds in stocks, bonds, money market instruments, or other securities. Unlike open-end funds, closed-end funds only offer and buy back the units offered at certain times according to stipulated conditions. Long story short, we cannot at any time redeem the funds we bought into closed-end funds.
Unit investment trusts (IUTs) offer fixed portfolios and sell them to investors through initial offerings to raise funds. The portfolio may contain stocks, bonds, money market instruments, or other securities. The investment manager at IUT is not actively trading its investment portfolio. Instead, they hold it for capital appreciation and dividend income. Thus, the UIT changes little or no during its lifetime.
Sovereign wealth funds
Sovereign wealth funds (SWFs) are government-owned investment funds and are vehicles for earning returns. Their funds can come from fiscal surpluses, money from privatization, and natural resource trade surpluses (such as oil).
The funds are then invested in various asset classes. Besides investing in the traditional asset classes such as stocks and bonds, they also invest in real estate, private equity, and hedge funds.
SWFs were created to build wealth and benefit future generations. In addition, they may also be used to stabilize the budget and the economy from the resulting excess volatility.
Then, SWFs may also be a vehicle for removing unwanted liquidity in the economy. For example, the domestic currency appreciates when the trade balance is surplus. If the surplus rises, the reserve surplus increases, and the domestic currency further appreciates. And that may not be desirable. Thus, SWFs collect the surplus and invest it.
Which sovereign wealth funds are the largest in the world? Here are the Top-10:
- Norway Government Pension Fund Global: $1,269 billion
- China Investment Corporation: $1,222 billion
- Abu Dhabi Investment Authority: $709 billion
- Kuwait Investment Authority: $708 billion
- GIC Private Limited: $690 billion
- Public Investment Fund: $620 billion
- Hong Kong Monetary Authority Investment Portfolio: $589 billion
- Temasek Holdings: $497 billion
- Qatar Investment Authority: $461 billion
- National Council for Social Security Fund: $447 billion