4. Institutional investors

OECD assigns to the group of institutional investors (II) mainly pension funds, investment funds and insurance companies⁶². II control a large amount of capital and therefore play an important role in the financial markets. By end of 2011, the estimated assets controlled by this group of investors was more than 65 trillion US$ for the member countries of the OECD only.

Illustration 12: Relative share and total assets by type of institutional investors, 1995-2009 (USD billions)⁶³

Institutional Investors (II) act as financial intermediaries and fulfil transformation functions for the financial market. They transform volume, terms (time) and risk, e.g. II pool money from individuals and organisations, invest these funds in a economically and commercially reasonable way and return added value in form of transformation⁶⁴.

• Transforming volume: collecting money from many and lending to few
• Transforming terms (time period): transforming today’s available cash into available cash in the future (or vice versa)
• Transforming risk: the risk of the individual is diversified and transformed by the law of high numbers into lower risk (see also discussion of CAPM in previous chapter)
• Transforming allocation of capital: collect unused/ ineffective capital from the economy and re-allocate it to create reasonably added value

As Pension Funds fulfil important functions for every country, they are an integral part of a society’s wealth. Developing and emerging countries do often not yet have a pension system implemented and require assistance in reforming or establishing one. This makes Pension Funds subject to studies and research programs by international agencies and organisations such as OCD, World Bank IMF and others and this data is easily available.

For this reason the discussion is focused on the role of Pension Funds as one group of institutional investors.

⁶² OECD Research Project for INSTITUTIONAL INVESTORS AND LONG TERM INVESTMENT, 2012
⁶³ OECD Research Project
⁶⁴ Volckart p 801