Lesson 4 of 7 · All lessons in this module
- The portfolio approach and diversification
- The portfolio management process: planning, execution, feedback
- Individual investors and DC versus DB pension plans
- Institutional investors and their needsVideo lesson
- The asset management industry
- Mutual funds: open-end, closed-end and fund types
- SMAs, ETFs, hedge funds and private equity
Lesson 4 of 7 · 15 min
Institutional investors and their needs
Each institutional investor's liabilities shape its needs: pension plans and endowments can take long-term risk, banks and insurers must stay liquid and conservative, while investment companies and sovereign wealth funds vary fund by fund.
In short
- Institutional investors: DB pension plans, endowments and foundations, banks, insurance companies, investment companies and sovereign wealth funds.
- DB plans: long horizon, fairly high risk tolerance; income needs are high for mature plans (many retirees) and low for growing ones.
- Endowments and foundations: very long (often perpetual) horizon, high risk tolerance, large alternatives allocations, and an aim to preserve real value while funding spending.
- Banks: short horizon, low risk tolerance, highest liquidity needs to meet deposit withdrawals.
- Insurers: low risk tolerance and high liquidity to pay claims; life insurers invest longer-term than P&C insurers. The general account is conservative; the surplus account can take more risk.
- Investment companies need liquidity for redemptions; sovereign wealth funds are state-owned with no specific liabilities and varying goals.
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