Lecture 3 - Institutional Investment.docx

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Institutional Investment 1/29/2013 12:29:00 PM
What is an Institutional Investor?
Institutional investors manage the savings of many small investors
for a specific objective
Can tailor to fit risk and time profile of investors
They invest other people’s money, along with their own, in order to
beat the market
Types of Funds
In order of historical appearance
o Insurance companies
Basic model:
Collect insurance premiums from subscribers
Invest money
Pay benefits if needed
Oldest form of institutional investment
Prefers highly liquid investments
Extreme weather may require more frequent payouts,
depending on geographical locations
o Pension funds
Objective collect, pool and invest funds to provide for
the retirements of its contributors
In Anglo-Saxon countries, pension funds are governed
by trust law
Most of the time this acts as a tax shelter
(deferred taxation taxed more now to save for
later)
Types of pensions:
Defined benefit
Guarantees an income at retirement
More often than not, payment is indexed
against inflation
More expensive for the employer
Risk of bankruptcy
Youth could be subsidizing the old
No say in asset allocation
Defined contribution
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