Global Institutional Investors Research Articles

Устойчивые инвестиции и дивестиции институциональных инвесторов глобального уровня

The article analyzes the investment activity of sustainable institutional investors after the global financial and economic crisis of 2008. The relevance of the study is conditioned, firstly, by the leading positions of institutional investors in the global financial market and in the system of international finance; secondly, by the special role of mutual funds and ETFs in the global market of sustainable finance; thirdly, by the noticeable dynamics of investments by these market participants in recent years, which increasingly turns into divestments. The purpose of the study is to identify current trends in sustainable investment by global institutional investors and formulate their further actions in the short term. To do this, it is necessary to solve the following tasks: to clarify, taking into account the latest statistical data, the impact of the COVID-19 pandemic and other force majeure factors on the size and dynamics of the flow of funds of sustainable institutional investors in the leading countries of the world, and to assess the impact on investment prospects of current political and financial factors. In the course of the study, a significant amount of scientific research was analyzed, which served as a basis for identifying the institutional investors’ approaches to sustainable finance. It is concluded that the prospects for global sustainable investing are favorable due to the continued stimulation of environmental change at the supranational level, both in developed and leading developing countries. The financial success of sustainable investment will also contribute to this.

The rise of female board representation in China as a glocalization process (2010–2018)

Our examination of publicly listed firms in China (2010–2018) reveals that a firm promotes more women to its board when it faces either stronger global pressure, as measured by the ownership of global institutional investors, or stronger local pressure, as measured by the domestic industry average of female board representation. Local pressure has a stronger impact than global pressure, and the two substitute each other. More importantly, stronger global pressure is associated with the promotion of more returnee women but not of domestic women, while stronger local pressure is associated with the promotion of more domestic women but not of returnee women. The findings advance the literature by revealing that the adoption of female board representation in China is driven by the co-constitutive influences of “the global” and “the local”, and that different types of potential beneficiaries receive heterogeneous benefits in this glocalization process.

A systematic literature review on sustainability issues along the value chain in insurance companies and pension funds.

Sustainability is now a priority issue that governments, businesses and society in general must address in the short term. In their role as major global institutional investors and risk managers, insurance companies and pension funds are strategic players in building socio-economic and sustainable development. To gain a comprehensive understanding of the current state of action and research on environmental, social and governance(ESG) factors in the insurance and pension sectors, we conduct a systematic literature review. We rely on the PRISMA protocol and analyze 1731 academic publications available in the Web of Science database up to the year 2022 and refer to 23 studies outside of scientific research retrieved from the websites of key international and European organizations. To study the corpus of literature, we introduce a classification framework along the insurance value chain including external stakeholders. The main findings reveal that risk, underwriting and investment management are the most researched areas among the nine categories considered in our framework, while claims management and sales tend to be neglected. Regarding ESG factors, climate change, as part of the environmental factor, has received the most attention in the literature. After reviewing the literature, we summarize the main sustainability issues and potential related actions. Given the current nature of the sustainability challenges for the insurance sector, this literature review is relevant to academics and practitioners alike.

The everyday construction of value: A Canadian investment fund, Chilean water infrastructure, and financial subordination

AbstractInfrastructure in several economies in the Global South has rapidly undergone financialization, aided and abetted by governments opening-up their infrastructure assets to global institutional investors in search of stable, predictable revenue streams. This account of financialization could be the end of the story were it not for the fact that Christophers (2015) and others have shown that institutional investors are not simply in the game of ‘finding’ value or ‘harvesting it’ from obliging states, rather they actively construct it. What often catches the eye, however, are the more overt forms of financial engineering (Ashton et al., 2012), whereas what tends to go unnoticed are the ways in which infrastructure assets are routinely ‘worked’ to generate value over time. Here, we draw attention to a slower-paced financialization of infrastructure assets where, following Chiapello (2015, 2020), investors are engaged in a continual process of evaluation and revaluation of their assets to add value over and above prevailing benchmarks. Taking the example of Canada's Ontario Teachers’ Pension Plan (OTPP) and its extensive investments in Chilean water infrastructure, this article considers how a global investment fund draws on financial practices developed in the advanced economies to add value to long term infrastructure assets in the Global South. Such practices, we argue, enact a routine form of financial subordination which does not match the familiar image of wholly subservient and dominated dependent economies. Rather, the power asymmetries involved equate less to a zero-sum game and more to a game where the benefits are unequally shared between asset managers in the Global North and states in the Global South, where effectively the latter cooperate in their own submission in ways that are not always acknowledged as such.

The Global Market Portfolio

Two years after the global capital stock report of Gadzinski, Schuller, and Vacchino (2018) and 36 years after the world market wealth portfolio of Ibbotson, Siegel, and Love (1985), investors still lack a global composite portfolio benchmark that includes a broad spectrum of assets with weights in line with a fair representation of the stock of capital for each asset class. Despite ample evidence of the substantial use of alternatives and real assets in institutional portfolios, the authors argue that existing academic and practitioner attempts are still unable to provide a satisfactory approximation of the “true” global market portfolio. The authors fill this gap and provide two benchmarks: one for retail investors constrained by liquidity needs and one for institutional investors with access to illiquid assets. <b>TOPICS:</b>Portfolio construction, real assets/alternative investments/private equity, global markets, performance measurement <b>Key Findings</b> ▪ The authors provide two global market portfolio benchmarks, for retail and institutional investors, based on a measurable global capital stock, which includes 87 existing indices within 11 asset classes. ▪ Their investable global market portfolio is built with ETFs only and is therefore transparent and systematic. The total return index realizes a compounded annual average return of 4.7%, with a standard deviation of 10.1% during the period 2005 Q1–2020 Q2. ▪ Their noninvestable global market portfolio realizes a compounded average return of 5.9%, with a standard deviation of 6.3% and a maximum cumulative drawdown of 20%. Thanks to a better allocation of resources toward real assets, diversification is then achieved and makes their total return index an efficient long-term portfolio benchmark.

The Wall Street Consensus

ABSTRACTThe Wall Street Consensus is an elaborate effort to reorganize development interventions around partnerships with global finance. The UN's Billions to Trillions agenda, the World Bank's Maximizing Finance for Development or the G20's Infrastructure as an Asset Class update the Washington Consensus for the age of the portfolio glut, to ‘escort’ global (North) institutional investors and the managers of their trillions into development asset classes. Making development investible requires a two‐pronged strategy: enlist the state into risk‐proofing development assets and accelerate the structural transformation of local financial systems towards market‐based finance that better accommodates portfolio investors. Ten policy commandments forge the ‘de‐risking state’. They create a safety net for investors in development assets, protecting their profits from demand risks attached to commodified infrastructure assets; from political risks attached to (progressive) policies that would threaten cash flows, including nationalization, higher minimum wages and, critically, climate regulation; and from liquidity and currency risks. These risks are transferred to the balance sheet of the state. The new ‘development as de‐risking’ paradigm narrows the scope for a green developmental state that could design a just transition to low‐carbon economies.

Picking Partners: Manager Selection in Private Markets

We study the selection of private equity managers (GPs) for over 100,000 capital commitments between 1990 and 2019 by global institutional investors (LPs) choosing from a plausible contemporaneous opportunity set. LPs have large propensities to select first-time or young GPs without a performance history, in addition to chasing 4th quartile managers. LPs also have tendency to follow their peers’ investment decisions, to reinvest in the same GP, and to invest in GPs domiciled in the same state/country. These selection criteria, however, do not provide information material for future performance, and in the case of first-time GPs result in lower future performance.

Weathering Climate Change: Opportunities and Risks in an Altered Investment Landscape

After 100 centuries of relative stability, our planet’s climate is transforming. This climatic change is not a distant forecast of the future – it is verifiably happening now. Indeed, despite the significant uncertainty over the longer horizon, our climate destiny is largely predetermined over the next decade – the typical time frame of most long-term investors. Ironically, a highly certain climate destiny translates into massive uncertainty for long-term investors looking to navigate the opportunities and challenges unleashed by climate change. This is for a variety of reasons. First, the most definitive forecast of climate change is for more extreme and greater variability in weather outcomes, the precise timing and severity of which are unclear. Second, it is hard to predict when the externalities, tail risks and nonlinear vulnerabilities from climate change will be fully reflected in market prices. Third, the regulatory, governmental and societal response to climate change remains unclear, especially given the polarized political landscape in which climate change discussions are currently being conducted. Despite these uncertainties, we believe that climate change is one of the most important structural changes for long-term investors. The implications for investors lie as much around innovative and transformative technologies to further the transition to a lower-carbon world as they do around identifying and mitigating hidden vulnerabilities across their portfolio. To build an actionable climate change investment agenda, we have drawn on the insights of over 45 investment professionals across PGIM’s fixed income, equity, real estate, and private debt and alternatives managers; interviewed over 30 leading academics, economists, policymakers, scientists and climate change investors; and conducted a new proprietary survey of 100 global institutional investors to better understand their current investment actions and future aspirations around climate change. The humanitarian and economic catastrophe unleashed by COVID-19 in 2020 revealed investors’ vulnerability to nonlinear risks with unpredictable timing that are not easily accounted for in standard risk modeling. Climate change is the next slow-burning crisis that will radically reshape investors’ risks and opportunities over the next decade. Here at PGIM, we believe investors who understand the potential for climate change to disrupt and reshape the global economy, markets and the investment landscape will be best positioned to navigate the coming decades.

Sustainable Finance Disclosure in the EU Financial Sector

The aim of the chapter is twofold. On the one hand, it explores the main features of the Sustainable Finance Disclosure Regulation. On the other hand, it tries to assess whether the Sustainable Finance Disclosure Regulation is likely to succeed in harmonising sustainability-related (i) disclosure rules and (ii) fiduciary duties, not only across Member States, but also across financial products and distribution channels. The author concludes that before we reach a sufficient degree of harmonisation of sustainability-related disclosure rules and fiduciary duties there is still a long way to go. And even if we reach the required degree of harmonisation in the EU, it is not a given that this will necessarily lead to a more sustainable world. As may be gleaned from the European Green Deal and the Sustainable Finance Action Plan, the EU is aiming high when it comes to sustainability. But the EU is not an island. The author argues that there are roughly two opposite scenarios. In a pessimistic scenario, the more lenient or even non-existent sustainability agenda of other geopolitical powers gives them a competitive edge that is detrimental to the EU. In a positive scenario, the EU becomes a global standard-setter in the area of sustainability. Large global institutional investors such as Blackrock and State Street in any event say they are strong supporters of the sustainability agenda. Also, the re-entry of the USA in the Paris Climate Agreement under the Biden Administration may give us some hope.

Specialization and Institutional Investors’ Performance – Evidence from Publicly Traded Real Estate

We examine the extent to which 50,620 global institutional investors’ specialization in publicly traded real estate securities is related to their investment performance. Consistent with the information advantage theory (Merton Journal of Finance 42, 483–510, 1987; Van Nieuwerburgh and Veldkamp Journal of Finance, 64, 1187–1215, 2009), we show a positive relation between the percentage of the institution’s portfolio invested in real estate securities and the return generated on those securities. Moreover, we present evidence that the institution’s level of active share to real estate securities is positively related to performance. Additionally, we find that the benefits related to specialization are more pronounced for investors specializing in a narrow set of securities that requires a unique set of skills to analyze.

Impact of Institutional Indicators Influence on FDI Flows with Reference to BRICS Countries- An Empirical Research

The present study has been emphasized on the BRICS country foreign direct investments have been examined with the influence of institutional indicators. The present study has considered from the 2002 to 2017.The study has considered the six factors of the BRICS nations. The Robust regression analysis has been applied and the results indicated that the BRAZIL fdi inflows have got positively influenced by the institutional factors. The India and China fdi flows are strongly influenced positively by the institutional factors. The Quality of public service of South Africa fdi has got influenced highly positive. This paper is useful to the global institutional investors, country governments and other stake holders.

Development of the Long-Term Investment Market: Modern Transformations in the National Mechanism for Economic Growth Financing

The economic growth and its sustainability depend on volumes and dynamics of long-term investments that require careful forecast of the future. Therefore, the paper analyzes the development of long-term investment financing in Russia in 2016–2018. The relevance of the research stems from the need to seek new and develop existing sources of funding the economic growth in Russia. The subject of the research is a set of measures implemented in the framework of the national financial market development plan, compared with recommendations of global level institutional investors related to long-term investment financing. The purpose of the research was to formulate proposals on how to introduce global management recommendations into the national financial regulation practice and offer a set of actions to national governments to support long-term investment by institutional investors. Based on the research findings, it is concluded that the priority in the Russian financial policy should be given to decisions towards overcoming national development problems rather than to decisions aimed at harmonization of relations in the investment sphere and creation of favorable conditions for foreign institutional investors. It has been stated that the main criterion for making a financial decision in the Russian Federation should be development level achieved, challenges facing society as well as available resources and opportunities, including the tolerance (or intolerance) level of the international environment. This position is currently demonstrated by the national financial regulator.

Indian equity options: Smile, risk premiums, and efficiency

AbstractWe study the pricing of equity options in India which is one of the world's largest options markets. Our findings are supportive of market efficiency: A parsimonious smile‐adjusted Black model fits option prices well, and the implied volatility (IV) has incremental predictive power for future volatility. However, the risk premium embedded in IV for Single Stock Options appears to be higher than in other markets. The study suggests that even a very liquid market with substantial participation of global institutional investors can have structural features that lead to systematic departures from the behavior of a fully rational market while being “microefficient.”

The impact of mandatory IFRS reporting on institutional trading costs: Evidence from Australia

AbstractThis study examines the impact of mandatory International Financial Reporting Standards (IFRS) on the market quality of the Australian Securities Exchange (ASX) 200 constituent stocks. Using traditional metrics that are consistent with prior literature (i.e., bid‐ask spreads), the first stage analysis confirms that stock liquidity has improved. However, when the analysis is extended to consider the trading costs incurred by market participants (i.e., execution shortfall), results suggest liquidity has not changed significantly. The paper utilizes rich unique datasets that contain detailed trade information, and findings are robust after controlling for trade difficulty and market conditions. In the era of High Frequency Trading (HFT) and occurrences of ‘fleeting’ liquidity, this paper provides some evidence that while IFRS may have enhanced ‘visible’ bid‐ask spreads, tangible liquidity for market participants, particularly global institutional investors, has not improved significantly.

The Phenomenon of Related Dynamics in Global Finances (Russia, Brazil)

The article establishes stable codependencies between international financial markets and their underlying cause and effect mechanisms, as an object of a global transformation. We demonstrate an intense co-integration between the financial markets of Russia, Brazil and the other emerging markets of Latin America (through the lens of stock markets and national currencies). The cause and effect mechanisms of this dependency are examined. We characterize the countries as analogous substitutes for investors (abundant similarities include: models of collective behaviour, ideology, model and structure of the economy, model of the financial sector, highly speculative markets in shares and currencies). The article explains an extremely limited role of the internal (primarily retail) investors in determining dynamics of the financial market. The central role of non-resident actors (global financial institutions and institutional investors) in the dynamics of the markets of Russian and Brazil is established. We demonstrate that for Russia and Brazil sources of foreign portfolio investments coincide. This includes Anglo-Saxon centers, specifically the US and British offshore jurisdictions, and the global centers of secondary importance (the Netherlands and Luxembourg). The decision making models of global investors in Russian and Brazil are examined: stock prices are driven by the oil prices, and in part by the US stock market, and rouble and real exchange rates follows oil prices and the EUR-USD currency pair. Analysis and conclusions made in the article are supported by a significant volume of statistical modelling.

Change above the Glass Ceiling: CSR and Gender Diversity in Japanese Firms

This article examines how local organizations respond to the global norm of corporate social responsibility, focusing on the case of workplace gender diversity in Japan. While many global institutional investors have declared their commitment to the principles of corporate social responsibility (CSR), whether and how their investment actually improves local practices has yet to be examined. We argue that changes implemented by local firms in response to pressure from global institutional investors are shaped by political dynamics among local professionals. Based on our interviews with CSR managers and consultants in Japan, we explain that CSR managers pushed for gender diversity only in the upper ranks of their organizations. This helped managers limit resistance from human-resources (HR) managers, who wanted to maintain the traditional employment system, while still gaining support from investor-relations (IR) managers, who supported changes visible to investors. Our findings from panel data analysis further document this change above the glass ceiling. Analyzing 800 Japanese firms between 2001 and 2009, we show that both foreign investment and within-firm influence of CSR and IR managers significantly increased the number of women on boards and in managerial positions, yet without improving the lot of those in non-managerial or entry-level positions. Our study contributes to the research on diffusion and organizational change by illuminating inter-professional politics in the local implementation of global norms.

Change above the Glass Ceiling: Corporate Social Responsibility and Gender Diversity in Japanese Firms

This article examines how local organizations respond to the global norm of corporate social responsibility (CSR), focusing on the case of workplace gender diversity in Japan. Though many global institutional investors have declared their commitment to CSR principles, whether and how their investments actually improve local practices has yet to be examined. We hypothesize that changes implemented by local firms in response to pressure from global institutional investors are shaped by political dynamics among competing professional groups in organizations. Through interviews with CSR managers and consultants in Japan, we find that CSR managers push for gender diversity only in the upper ranks of their organizations. This helps managers limit resistance from human resources managers, who want to maintain the traditional employment system, while still gaining support from investor relations managers, who support changes that are visible to investors. Our findings from panel data analysis further document this change above the glass ceiling. Analyzing more than 800 Japanese firms between 2001 and 2009, we show that both foreign investment and the within-firm influence of CSR and investor relations managers significantly increased the number of women on boards and in managerial positions but did not improve the lot of those in non-managerial or entry-level positions. Our study contributes to research on diffusion and organizational change by illuminating interprofessional politics in the local implementation of global norms.

Drivers behind the monitoring effectiveness of global institutional investors: Evidence from earnings management

This paper studies the drivers behind the monitoring effectiveness of institutional investors in curbing earnings management in an international setting. We identify three distinct drivers and propose two competing hypotheses: the hometown advantage hypothesis predicts that because of proximity to monitoring information, domestic institutions have a comparative advantage over foreign institutions in deterring earnings management, whereas the global investor hypothesis predicts that foreign institutions have a comparative advantage because of their proclivity toward activism and ability to deploy superior monitoring technologies. Consistent with the hometown advantage hypothesis, in aggregate, domestic, but not foreign, institutional ownership is associated with less earnings management; the monitoring effectiveness of foreign institutions improves as they gain proximity to monitoring information. Consistent with the global investor hypothesis, the monitoring effectiveness of foreign institutions improves in environments of greater agency conflicts or weaker governance controls or when the gap in monitoring technology between foreign and domestic institutions widens.

Energy Efficiency Policies for Local Communities (SSA)

With a tight growing national budget in developing countries and the rising demand for electricity, policymakers are seeking for private capital as a key source for funding energy efficiency and climate change related infrastructure. Developing countries seek to target energy efficiency programs as means of saving significant energy from such programs to distributed to the large number of communities living without access to modern energy for lighting and cooking. Designing Institutional framework to achieving these targets are prime recommendations from several preachers. These institutional frameworks must target institutional investors such as the Global energy fund (GEF), insurance companies and other long term investors whose $71 trillion in assets form one of the largest pools of private capital in the world. These funds can be used to address developing (SSA) country’s energy needs through energy efficiency and climate change mitigation programs. Empirical evidence by several researchers on Climate Policy state that, various attractive investment opportunities exist, if nations could reduce institutional barriers to attract investors for renewable energy and energy efficiency projects. Other investor groups recommended by researchers are the Global Investor Coalition on Climate Change (GIC) and UNEP Finance Initiative (UNEP FI) together represent global institutional investors responsible for over $22 trillion in assets. Thus, the question becomes whether developing countries are prepared to enact and align policies to bridge the financing gap in attracting institutional investments to address their energy shortfalls and climate change challenges?

The Book-to-Market Anomaly in the Chinese Stock Markets

I. INTRODUCTIONThe book-to-market effect (otherwise known as the effect) is an empirical regularity that stocks with high book-to-market (BM) ratios (low market prices to the book values of equity) earn higher average (riskadjusted) returns than stocks with low BM ratios. Many previous asset pricing studies suggest that the existence of premium can be explained from either the perspective of risk or the influence of mispricing factors.? Findings from these asset pricing studies extensively rely on datasets from the U.S. stock market which not only has a large pool of global institutional investors but also is considered a relatively efficient market.Previous studies such as Fama and French (1998 and 2012) and Asness, Moskowitz and Pedersen (2013) have also confirmed the existence of premium in international financial markets. However, premium could exist in various markets with different explanations. For example, risk-based explanation has built on the efficient market hypotheses. Those explanation may fit in the U.S. market, but not in other less developed and less efficient markets such as the Chinese market. Drew, Naughton, and Veeraraghavan (2003) and Euna and Huang (2007) have shown that the premium exists in Chinese markets. However, they have not provided its explanation.Unlike previous studies, this study goes further by providing the explanation for the existence of premium in Chinese markets. We notice that the Chinese stock market is a natural candidate for testing whether individual investors drive premium with the following reasons. First, the mainland Chinese stock markets are often perceived as casinos driven by fast money flows in and out of stocks with little regard for their underlying value (Wall Street Journal, August 22 2001). In addition, the segmentation of the markets and the predominance of individual investors in these markets make the Chinese stock market a natural candidate for testing whether individual investors drive premium.Our results confirm that, like Drew et al. (2003) and Eun and Huang (2007), the premium does exist in the Chinese markets for the period from 1994 to 2010. Moreover, there is a significantly negative relationship between institutional ownership of stocks and premium. This is apparently consistent with findings of Phalippou (2007, 2008) that premium is related to trading activities of individual investors, not institutional investors in the U.S. market.Our findings with the Chinese firms contribute to empirical asset pricing literature by providing international supporting evidence that the premium could be driven by individual investors, whereas stocks that are mostly held by institutional investors are value-premium free.The rest of the paper is organized as follows. Section 2 reviews the literature regarding the premium, the characteristics of the Chinese stock markets and develops several testable hypotheses. Section 3 then discusses the datasets and explains the empirical methodology. The empirical results are analyzed in detail in Section 4. Finally, this paper concludes by discussing the implications of our results for policy regulators, the role of institutional investors, and the overall market efficiency in China.II. THE VALUE PREMIUM AND CHINESE STOCK MARKET1. The Value Premium and Its ExplanationThe economic interpretation of the premium is a much debated issue, with current explanations falling into two broad categories. One explanation suggests that the premium is compensation for risk that is not captured by the capital asset pricing model (Fama and French, 1995, 1996, 1998; Lindaas and Simlai, 2014). In particular, Fama and French suggest that the premium is apparently related to the degree of relative in the economy. When the economy weakens, investors demand a higher risk premium on firms with distress characteristics. …