Institutional investors / E. Philip Davis and Benn Steil.

Format:

Book

Author/Creator:

Davis, E. P. (E. Philip), 1957- author.

Contributor:

Steil, Benn.

Language:

English

Subjects (All):

Institutional investments.

Physical Description:

1 online resource (xxxi, 524 pages)

Place of Publication:

Cambridge, Mass. : MIT Press, [2001]

System Details:

text file

Summary:

One of the most important recent developments in financial markets is the institutionalization of saving associated with the growth of pension funds, life insurance companies, and mutual funds. An increasing proportion of household saving is now managed by professional portfolio managers instead of being directly invested in the securities markets or held in the form of bank deposits. With the aging of the population and its adverse impact on public pension systems, the shift of individual savings to institutional investors is likely to become even more marked in the coming years.This book provides a comprehensive economic assessment of institutional investment. It charts the development and performance of the asset management industry and analyzes the implications of rising institutionalized saving for the development of the securities trading industry, the financial sector as a whole, and the wider economy. The book draws extensively on international experience, particularly in the United States, Western Europe, and Japan.

Contents:

I The Development and Performance of Institutional Investors 1

1 The Development of Institutional Investors 3

1.1 Size of Institutions and Financial Systems 3

1.1.1 Summary Ratios and Institutional Investment 4

1.1.2 Estimates of the Size of Institutional Investors 9

1.2 Characteristics of Institutions and Their Role in the Financial Sector 12

1.2.1 General Features Common to All Institutional Investors 12

1.2.2 The Main Types of Institutional Investor 14

1.2.3 Risk Bearing and Regulation 18

1.3 Institutional Investors and the Functions of the Financial Sector 21

1.4 Institutions and Financial Development 25

1.4.1 Development of Corporate Financing 25

1.4.2 Three Phases of Financial Development and the Role of Banks 27

1.4.3 Preconditions for Financial Development 28

1.5 Supply and Demand Factors Underlying the Growth of Institutional Investors 29

1.5.1 Household and Institutional Balance Sheet Composition 29

1.5.2 Supply-Side Factors Favoring Growth of Institutional Investors 34

1.5.2.1 Structural Aspects 34

1.5.2.2 Recent Developments 38

1.5.3 Demand Factors 41

1.5.3.1 Past Demographic Factors and Institutional Saving 42

1.5.3.2 Future Demographic Changes 44

1.5.3.3 Pressures on Pension Systems in the Wake of Population Aging 45

1.5.3.4 Saving Projections in the Light of Demographic Shifts 48

1.5.3.5 Nondemographic Aspects 49

2 Investment Behavior and Performance of Institutional Investors 51

2.1 Asset Management Objectives and Constraints 52

2.1.1 The Risk-Return Trade-Off 52

2.1.2 Steps in Institutional Investment 53

2.1.3 The Role of Liabilities 55

2.1.4 Alternative Approaches to Asset Allocation 56

2.1.5 The Role of Conventions 57

2.1.6 Investment Techniques: Active and Passive Management 58

2.1.7 Style Analysis 61

2.2 Investment Considerations for the Main Types of Institutional Investor 63

2.2.1 Mutual Funds 64

2.2.2 Life Insurers 65

2.2.3 Pension Funds 66

2.2.3.1 Defined Contribution Pension Funds 68

2.2.3.2 Defined Benefit Pension Funds 69

2.2.4 The Role of Individual Investors in Determining Institutional Behavior 72

2.3 Topics in Investment 74

2.3.1 Issues in Equity Investment 74

2.3.2 International Investment 75

2.3.2.1 Arguments Favoring International Investment 75

2.3.2.2 Reasons for Home Asset Preference 77

2.3.3 Derivatives 79

2.3.4 Performance Measurement 80

2.4 Asset Manager Performance at a Micro Level 81

2.4.1 Asset Manager Performance: Mutual Funds 82

2.4.2 Asset Manager Performance: Pension Funds 87

2.5 Asset Manager Returns at a Macro Level: A Case Study of Pension Fund Sectors 94

2.5.1 Influences on the Portfolio 95

2.5.2 Returns and Risks on the Portfolio 103

II The Industry of Asset Management: Present and Future 111

3 The Industrial Structure and Dynamics of Asset Management 113

3.1 What Is Asset Management? 114

3.2 Aspects of the Industrial Economics of Financial Institutions 115

3.2.1 The Structure-Conduct-Performance Model 116

3.2.2 Contestable Markets 118

3.2.3 Discretion and Managerial Approaches 119

3.2.4 Strategic Competition 120

3.3 Generic Aspects of the Asset Management Industry 122

3.3.1 Wholesale Asset Management 123

3.3.1.1 Generic Asset Management 123

3.3.1.2 Specialized Asset Management 124

3.3.1.3 Balanced Management 126

3.3.1.4 General Features of Wholesale Management 127

3.3.2 Retail Asset Management 128

3.4 The U.S. Asset Management Sector 131

3.4.1 Wholesale Asset Management in the United States 132

3.4.1.2 Structural Aspects 135

3.4.1.3 Conduct and Performance 139

3.4.2 Retail Asset Management in the United States 142

3.4.2.2 Structural Aspects 144

3.4.2.3 Conduct and Performance 149

3.5 The U.K. Asset Management Sector 151

3.5.1 Wholesale Asset Management in the United Kingdom 153

3.5.1.2 Structural Aspects 155

3.5.1.3 Conduct and Performance 157

3.5.2 Retail Asset Management in the United Kingdom 162

3.5.2.2 Structural Aspects 162

3.5.2.3 Conduct and Performance 164

3.6 The Continental European Asset Management Sectors 165

3.6.1 Wholesale Asset Management in Continental Europe 167

3.6.1.2 Structural Aspects 168

3.6.1.3 Conduct and Performance 169

3.6.2 Retail Asset Management in Continental Europe 172

3.6.2.2 Structural Aspects 173

3.6.2.3 Conduct and Performance 176

3.7 The Evolution of Wholesale Asset Management in Japan 177

3.7.1 The Historical Situation 177

3.7.2 Recent Changes 179

3.7.3 The Mutual Fund Sector 180

4 Influences on the Future of the Asset Management Industry 183

4.1 Challenges in the U.S. Market 183

4.1.1 Wholesale Asset Management 183

4.1.2 Retail Asset Management 185

4.1.3 Social Security Privatization 188

4.2 The Future of U.K. Asset Management 189

4.3 Europe: European Monetary Union and Institutional Investors 192

4.3.1 Ongoing Forces for Change 192

4.3.2 EMU and Pension Provision 195

4.3.3 Improved Conditions for Institutional Investment under EMU 196

4.3.4 Pressures on Banks' Traditional Business 198

4.3.5 The Scope of Potential Change in Financing 199

4.4 Globalization of the Industry? 200

4.5 Questionnaire Answers Relating to the Structure and Dynamics of Asset Management Sectors 205

4.5.1 Sample Characteristics 206

4.5.2 Elements of Competition in the Market 209

4.5.3 Barriers to Entry in Domestic Markets 212

4.5.4 Barriers to Entry in Foreign Markets 214

4.5.5 Expectations Regarding Industry Structure 215

4.5.6 Economies of Scale 216

4.5.7 Influences on the Asset Management Sector over the Next Five Years 218

III Institutional Investment, the Financial Sector, and the Economy 223

5 Implications of the Growth of Institutional Investors for the Financial Sectors 225

5.1 Implications for Capital Markets 226

5.1.1 Institutional Investors and the Growth of Capital Markets 226

5.1.1.1 Patterns of Institutional and Capital Market Developments 226

5.1.1.2 Experience in Chile 229

5.1.1.3 Estimates of the Relationship of Institutionalization to Capital Market Development 232

5.1.2 Institutional Investors and Securities Market Structure 236

5.1.2.1 General Considerations 236

5.1.2.2 Institutional Investors and Equity Market Structure 237

5.1.2.3 Institutional Investors and Debt Market Structure 239

5.1.2.4 Derivatives and Other New Markets 240

5.2 Implications for Banks 243

5.2.1 Trends in Banking 243

5.2.2 Competition on the Liabilities Side 246

5.2.3 Competition on the Asset Side 247

5.2.4 Bank's Responses to Disintermediation 250

5.2.5 The Future of Banking 252

5.3 Institutionalization and Financial Stability 255

5.3.1 Institutions and Securities Market Turbulence: General Considerations 255

5.3.2 Asset Price Volatility 257

5.3.3 Herding by Institutional Investors 259

5.3.4 Capital Market Instability 265

5.3.4.2 Herding and Price Volatility 267

5.3.4.3 Market Liquidity Risk 268

5.3.4.4 Why Are Market Liquidity Crises of Concern? 270

5.3.4.5 Institutional Investors and Liquidity in the Russia/LTCM Episode 271

5.3.5 Institutional Behavior and Emerging Markets 274

5.3.6 U.S. Mutual Funds and Financial Stability 278

5.3.7 The Threatened Insolvency of Japanese Institutional Investors 282

6 Implications of the Growth of Institutional Investors for the Nonfinancial Sectors 287

6.1 Macroeconomic Implications of Institutionalization 288

6.1.1 Institutions and Saving 288

6.1.2 Institutions and Financing Patterns 292

6.1.3 International Capital Flows 295

6.1.3.1 Trends in Portfolio Investment 295

6.1.3.2 International Investment and Portfolio Strategies 298

6.1.3.3 Causes of Increased International Investment 299

6.1.3.4 Macroeconomic Implications 300

6.2 Corporate Finance Issues 302

6.2.1 Corporate Financing Patterns and Debt Finance 302

6.2.2 Corporate Governance and Institutional Investors in the United States 305

6.2.2.1 Agency Costs and Equity Finance 305

6.2.2.2 Four Paradigms of Corporate Governance 308

6.2.2.3 The Corporate Governance Movement in the United States 311

6.2.2.4 Effectiveness of Shareholder Activism 315

6.2.3 Corporate Governance in Europe and Japan: A Revolution in Corporate Financing? 317

6.2.3.1 Institutional Investors and Bank-Based Systems of Corporate Finance 317

6.2.3.2 Barriers to Change 319

6.2.3.3 EMU and Corporate Governance 320

6.2.3.4 Risks in the Transition 322

6.2.4 Short-Termism 323

6.2.5 Small Firm Finance 325

6.3 The Public Sector and Policy Issues 330

6.3.1 Government Finance 330

6.3.2 Financial Regulation 333

6.3.3 Monetary Stability 337

6.3.4 Financial Stability 340

IV Institutional Trading 345

7 Automation, Trading Costs, and the Structure of the Securities Trading Industry / Ian Domowitz, Benn Steil 347

7.1 Automation and Network Effects 350

7.1.1 Networks in the Context of Automated Trading and Market Structure Development 352

7.1.1.1 Entry and Cost 352

7.1.1.2 Entry and Strategic Pricing 356

7.1.1.3 Adapters and Incompatible Networks 357

7.1.1.4 Remote Cross-Border Trading 357

7.1.1.5 Mergers and Alliances 358

7.2 Automation and Cross-Subsidization of Trading 361

7.2.1 Cross-Subsidization of Large Trades by Small Trades 362

7.2.2 Cross-Subsidization of On-Exchange by Off-Exchange Trades 364

7.2.3 Cross-Subsidization of Retail Trades by Institutional Trades 364

7.3 Automation and Exchange Governance 365

7.4 Market Quality Comparisons 369

7.4.1 Bid-Offer Spreads 371

7.4.2 Depth of Market 372

7.4.3 Informational Efficiency 372

7.4.3.1 Adverse Selection 373

7.4.3.2 Transmission of Information to Prices 374

7.4.4 Volatility 374

7.4.5 What Have We Learned about Relative Market Quality? 376

7.5 Transaction Costs, Intermediation, and Market Structure 378

7.5.1 The Data 379

7.5.2 The Definition of Transaction Costs 382

7.5.3 Average Trading Costs 383

7.5.4 A Benchmark Correction for Trade Difficulty 386

7.5.5 Execution Costs Relative to Benchmark Costs 388

7.5.6 Trade Characteristics and Total Trading Costs 390

8 Institutional Trading Costs: The Impact of Market Structure and Trading Practices 399

8.1 The Significance of Trading Costs: The Implementation Shortfall 400

8.2 Measuring and Decomposing Trading Costs 400

8.2.1 Explicit Costs 400

8.2.2 Implicit Costs 401

8.2.2.1 Bid-Offer Spreads 401

8.2.2.2 Market Impact 403

8.2.2.3 Opportunity Costs 405

8.3 Trading Costs and Investment Style 407

8.4 Trading Costs and Order Handling 408

8.4.1 Managing Information Leakage 408

8.4.2 Managing Commissions 410

8.4.3 VWAP Trading 417

8.5 Trading Costs and Market Structures 419

8.5.1 Auction versus Dealer Markets 419

8.5.2 Intermediated versus Nonintermediated Markets 421

8.5.3 ECN Trading 423

8.5.3.1 Alphabet Soup 423

8.5.3.2 Institutional ECN Use 424

8.5.3.3 The Future of ECNs 428

8.6 The Future of Institutional Trading 429

8.6.1 Trading Systems 430

8.6.2 The Major Players 431

8.6.3 Trade Intermediation 432

8.6.4 Public Policy 432.

Notes:

OCLC-licensed vendor bibliographic record.

ISBN:

0262041928

9780262041928

0585377790

9780585377797

9780262271264

0262271265

OCLC:

48138191

Access Restriction:

Restricted for use by site license.