What Impact Do The Big Investment Institutions Have On The Stock Exchange?

Investments traded on the stock exchange are largely held by 'institutions'. These may take the form of pension funds, insurance companies, collective investment funds (unit trusts or mutual funds) and hedge funds.

A survey carried out in the UK in 2002 (by the Investment Management Association) concluded that 54% of the £1,934 billion owned by these groups was held in equities (stocks). It is believed (again in the UK) that between 50% and 60% of all gilts (government loan securities) and shares are held and managed by the institutions.

As you might imagine, this means that they wield enormous power. This power ranges across modern life from the boardroom to the market. This in turn can have an impact on employees, pensioners and even governments!

Indirect investment via an investment institution in capital market instruments is now the most popular way for a private individual to invest.Typically, this investment takes the form of monthly contributions into pension plans and long term savings schemes.

These institutions enable small investors to buy a stake in a large, diversified portfolio of assets. If they were to purchase assets themselves, they would only be able to buy a small number of securities, with very little or no diversification.

The biggest hitters

In the world of investment institutions, some of the biggest players have only really emerged since around the year 2000. These funds are run by governments to invest their national wealth and are known as sovereign wealth funds.

There are a number of countries with very powerful sovereign wealth funds. The money they invest tends to come from natural resources such as oil and natural gas. As part of the arrangement with the oil majors that develop the fields and extract the oil and gas, a small percentage of total revenue is set aside into the fund for the good of the country. As might be imagined, this tends to build up quite quickly!

While some of these funds were established decades ago, the increase in price for oil and natural gas since the year 2000 has provided them with much more money and purchasing power than they had ever previously had.

For some of these countries, it could be argued that the money could be put to better use by developing the national infrastructure. Other nations such as Qatar, Dubai and Norway clearly have less need for these development projects.

These funds tend to buy marquee property in major cities, government bonds, gold and stock market assets. On one level, they clearly aim to assert themselves and their country on the global stage. On another level, investment returns are very important.

For example, I have read that it is estimated that the Norwegian sovereign wealth fund owned (in 2010) approximately 2% of all stock market assets. Worldwide.

Wow. It isn't even the biggest fund.

Many of these funds are clearly much bigger than even the very largest hedge funds. One large and very important difference though is the way in which they invest their money. The sovereign wealth funds are typically looking to own and control the very best quality assets available worldwide. Many hedge funds only own an asset for a second.

In this regard it is best to think of the SWF community as being collectors of the very best worldwide on behalf of their government's and people's.

Up, up and away

Since these funds are not typically 'trading', they do not add to volatility or increase the risk in the market.

However, the prices fetched for the very best assets that they covet have clearly increased. With a wide range of funds and billionaires all chasing after the same exclusive art works, commercial property, land, etc, the floor supporting these assets has been raised significantly.

Whether this is a good thing or not can be debated long and hard. It is, however, very real. It seems reasonable to presume that while the prices of oil and gas stay high, the wealth and power being accumulated by these funds will grow and grow.

To read more, please follow these links:

What Is A Stock Exchange And What Does It Do?

What Is An Efficient Capital Market?

Stock Exchanges And National Economies

Executing A Trade On The Stock Exchange

Why Are There So Many Stock Exchange Scandals?

Increased Regulations And The Sarbanes Oxley Act

Investment In A Stock Exchange

Learn About The Important Role Of Stock Rating Agencies

How Big Should Stock Market Bonuses Be?