Latin American Capital Markets

CHAPTER 5Institutional Investorsand Capital Market DevelopmentKaren Goldstein RossottoInstitutional investors play an increasingly important role in the world's capital markets.These investors—primarily pension funds, insurance companies, open-end investmentcompanies (mutual funds), and closed-end investment companies—professionallymanage pooled assets on behalf of their beneficiaries, policyholders, andshareholders. 1 Within the financial system, institutional investors act as the holdersand managers of individual savings and wealth, as well as high-volume traders, newsources of capital financing, and influential shareholders.Over the past half-century, total assets under institutional management havegrown tremendously, although to different degrees across regions and countries.TheU.S. institutional sector, one of the earliest to develop, accounts for a substantial percentageof U.S. financial assets. Institutional investors have also become a major forcein the markets of other industrial economies, notably the high-income members ofthe Organisation for Economic Co-operation and Development (OECD). Althoughpension fund and insurance company assets account for the majority of institutionalassets in OECD countries, the mutual fund industry has recently become particularlyimportant, most notably in the United States, but also in other mature markets.The establishment of institutional investors in OECD countries has occurredfor a number of interdependent reasons. A favorable economy, the need for retirementsupport and investment diversification, tax incentives, increased investor confidencethrough regulation and education, and improved distribution techniques created demandfor institutional investment products. In addition, deregulation and competition,effective corporate governance, and the integrated nature of the OECD economiescreated an ample supply of financial assets in which institutions could invest. Further-Copyright © by the Inter-American Development Bank. All rights reserved.For more information visit our website: www.iadb.org/pub1 Other institutional investors include banks, trade unions, endowment funds, and generally any firm or individual thattrades large volumes of securities. For the purposes of this chapter, the term "institutional investor" encompasses bothinstitutional money managers (for example, investment advisers) as well as the institutional portfolios they administer