Large financial institutions investing in markets are often called institutional investors and are distinguished from smaller or retail investors because they transact large values of securities at a time and so generally face fewer regulatory restrictions. They include asset managers, private and public pension funds, insurance companies and charitable foundations among others.
The better-known institutional investors are the big banks, insurers and the so-called bulge bracket of wealthy Wall Street and brokers investment managers. But in recent years so-called 'activist' institutions like public pension funds CalPERS and TIAA-CREF have become more influential in corporate decision-making as their influence has grown.
Institutional investors in U.S. financial markets have rapidly increased their asset holdings over recent years, holding a combined $24.1 trillion in 2005 compared to $17.3 trillion in 2002 and just $10 trillion in 2000. And over the same period institutions increased their holdings of U.S. equities from 51.4 percent of the total in 2000 to 61.2 percent in 2005.
Institutional demand for fixed-income securities helped fuel growth for securitized debt instruments, but institutions took hit in 2007 when the market for subprime mortgage-backed structured debt collapsed. Adding insult to injury, U.S. Federal Reserve Bank recently placed part of the blame for that collapse at the feet of instutitonal investors for underestimating the market's risks.
Fed. Vice Chairman Donald Kohn in April 2008 said insitutions had "failed" to do better due diligence on the subprime risks they were taking on and instead relied solely on "inadequate" analyses by credit-rating agencies like Standard & Poor's Corp. and Moody's.
- Institutional Investors: Why They're Important and How to Find Information About Their Holdings. Corporate Research E-Letter No. 2.
- U.S. Institutional Investors Continue to Boost Ownership of U.S. Corporations. Conference Board.
- Fed’s Kohn: Institutional investors share blame. Pensions & Investments.