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Institutional Investors
International Review of Economics and Finance 12 (2003) 145 – 147
Book review Institutional Investors By E. Philip Davis and Benn Steil, 2001, MIT Press, Cambridge, MA, ISBN 0262041928 In recent years, the financial markets have experienced a dramatic shift from individual savings (direct investment of securities and bank deposits) to institutional investing (pension funds and mutual funds). As such, with almost US$30 trillion under management, professional portfolio managers play an increasing role in the decision-making involving these invested funds. Institutional Investors provides an in-depth examination of institutional investment, traces the evolution and performance of the asset management industry, and develops possible implications from this financial subsector on the economy. Specifically, two ‘‘institutional’’ aspects are covered in the book: institutional investment and asset (fund) management. Many investment textbooks bundle these two processes together, thereby blurring their distinctive differences and applications. Institutional Investors, on the other hand, recognizes that the asset management role could be legally separated from the institutional investor role, thereby creating agency problems and corresponding capital market effects. The primary focus of the book involves the United States and the United Kingdom because these markets have experienced the most in institutional growth, the regulations in these markets are the least restrictive, and most academic literature cover these markets. Western Europe and Japan also command a great deal of attention in the book. I believe that the book is appropriate for graduate level investments or institutions courses that require a very deep understanding of the evolution and operations of the institutional investing industry. The book is divided into eight sections: The Development and Performance of Institutional Investors; Investment Behavior and Performance of Institutional Investors; The Industry of Asset Management: Present and Future; Influences on the Future of the Asset Management Industry; Institutional Investment, the Financial Sector, and the Economy; Implications of the Growth of Institutional Investors for the Non-financial Sectors; Institutional Trading; and Institutional Trading Costs: The Impact of Market Structure and Trading Practices. A glossary of 19 pages is provided. Eighty-seven tables are scattered throughout the book and both name and subject indexes are covered. A very comprehensive reference section spanning 32 pages is included. In sum, the book is clearly written, logically organized, and the facts are extensively documented and convincingly presented.
doi:10.1016/S1059-0560(02)00157-0
146
Book review
A brief summary of each chapter follows: Chapter 1 presents the growth and development of institutional investors (pension funds, insurance companies, and mutual funds) in G-7 countries. The data span 1970–1998 and the analysis provides historical perspective to growth and changes in several different performance measures. Dramatic differences are exposed across countries and the authors attempt to access the supply side and demand side causes for growth in the institutional sectors. Given the differences in the performance of institutional investors in the G-7 countries, Chapter 2 looks at the economic influences on the varying portfolio behaviors. A comprehensive summary of the literature regarding the performance of fund managers at both micro and macro levels is provided. Most interesting is the contrasting of pension fund operations in the seven countries. Specific constraints and opportunities under which funds in each country function are fully described and put into context in the environment in which the institutional investors operate. Chapter 3 assesses the asset management industry and considers the effects of competition. Retail and wholesale asset management sectors in the United States, the United Kingdom, and Europe are compared. Differences in the markets are addressed. Whereas Chapter 3 focused on the history of asset management markets, Chapter 4 turns the attention to future prospects. The possible implications of the introduction of the Euro on European asset management are particularly interesting. The chapter concludes with the results of a survey of 72 chief investment officers. Questions involve market structure, conduct, performance, and future prospects. The results and accompanying analysis would make for excellent discussion in a graduate class. Chapter 5 gauges the broader economic and financial implications of the growth of institutional investors and their impact on the effective functioning of the financial system. For example, the development of institutional investors has impacted on the size of the capital market which, in turn, impacts on the efficiency of the broad economy. Institutional Investors analyzes how the emergence of institutional investing affects stock volatility, liquidity, and overall financial stability. Recent examples from Chile, Asia, and Russia are presented. The effects of the growth of institutional investors for the nonfinancial sectors are addressed in Chapter 6. Saving behavior and international capital flows is the focus. Implications for policymakers are also presented. Particularly noteworthy is the lengthy treatment on corporate governance and institutional investors in the United States. Chapter 7 turns to the technology of trading. The advances in automated trade execution on the cost of institutional trading and on the whole securities industry are considered. In particular, the impact of automation on institutional trading costs is analyzed through a study of 5 years of trading data provided by a large (US$44 billion) mutual fund. The book concludes with Chapter 8, where institutional trading is examined in much greater detail. Trading costs are decomposed into components and measured. The effect on trading costs by different market structures (e.g. auction vs. dealer) is also analyzed. A look at the future is offered by projecting how institutional trading is likely to evolve in the coming years. The overall value of Institutional Investors is in its comprehensive examination of the institutional investment industry. The focus is not only on the United States but includes the major world markets as well. The material is not a summary in nature but extremely detailed with supporting data. The scope is not merely to describe the state of institutional investing
Book review
147
but to provide insight and explanation for how the industry evolved to the point where it is at and to offer convincing forecasts for where it is heading. Reinhold P. Lamb College of Business Administration, University of North Florida, 4567 St. Johns Bluff Road, South Jacksonville, FL 32224-2675, USA E-mail address: [email protected] Tel.: +1-904-6202630; fax: +1-904-6203861
Book review Institutional Investors By E. Philip Davis and Benn Steil, 2001, MIT Press, Cambridge, MA, ISBN 0262041928 In recent years, the financial markets have experienced a dramatic shift from individual savings (direct investment of securities and bank deposits) to institutional investing (pension funds and mutual funds). As such, with almost US$30 trillion under management, professional portfolio managers play an increasing role in the decision-making involving these invested funds. Institutional Investors provides an in-depth examination of institutional investment, traces the evolution and performance of the asset management industry, and develops possible implications from this financial subsector on the economy. Specifically, two ‘‘institutional’’ aspects are covered in the book: institutional investment and asset (fund) management. Many investment textbooks bundle these two processes together, thereby blurring their distinctive differences and applications. Institutional Investors, on the other hand, recognizes that the asset management role could be legally separated from the institutional investor role, thereby creating agency problems and corresponding capital market effects. The primary focus of the book involves the United States and the United Kingdom because these markets have experienced the most in institutional growth, the regulations in these markets are the least restrictive, and most academic literature cover these markets. Western Europe and Japan also command a great deal of attention in the book. I believe that the book is appropriate for graduate level investments or institutions courses that require a very deep understanding of the evolution and operations of the institutional investing industry. The book is divided into eight sections: The Development and Performance of Institutional Investors; Investment Behavior and Performance of Institutional Investors; The Industry of Asset Management: Present and Future; Influences on the Future of the Asset Management Industry; Institutional Investment, the Financial Sector, and the Economy; Implications of the Growth of Institutional Investors for the Non-financial Sectors; Institutional Trading; and Institutional Trading Costs: The Impact of Market Structure and Trading Practices. A glossary of 19 pages is provided. Eighty-seven tables are scattered throughout the book and both name and subject indexes are covered. A very comprehensive reference section spanning 32 pages is included. In sum, the book is clearly written, logically organized, and the facts are extensively documented and convincingly presented.
doi:10.1016/S1059-0560(02)00157-0
146
Book review
A brief summary of each chapter follows: Chapter 1 presents the growth and development of institutional investors (pension funds, insurance companies, and mutual funds) in G-7 countries. The data span 1970–1998 and the analysis provides historical perspective to growth and changes in several different performance measures. Dramatic differences are exposed across countries and the authors attempt to access the supply side and demand side causes for growth in the institutional sectors. Given the differences in the performance of institutional investors in the G-7 countries, Chapter 2 looks at the economic influences on the varying portfolio behaviors. A comprehensive summary of the literature regarding the performance of fund managers at both micro and macro levels is provided. Most interesting is the contrasting of pension fund operations in the seven countries. Specific constraints and opportunities under which funds in each country function are fully described and put into context in the environment in which the institutional investors operate. Chapter 3 assesses the asset management industry and considers the effects of competition. Retail and wholesale asset management sectors in the United States, the United Kingdom, and Europe are compared. Differences in the markets are addressed. Whereas Chapter 3 focused on the history of asset management markets, Chapter 4 turns the attention to future prospects. The possible implications of the introduction of the Euro on European asset management are particularly interesting. The chapter concludes with the results of a survey of 72 chief investment officers. Questions involve market structure, conduct, performance, and future prospects. The results and accompanying analysis would make for excellent discussion in a graduate class. Chapter 5 gauges the broader economic and financial implications of the growth of institutional investors and their impact on the effective functioning of the financial system. For example, the development of institutional investors has impacted on the size of the capital market which, in turn, impacts on the efficiency of the broad economy. Institutional Investors analyzes how the emergence of institutional investing affects stock volatility, liquidity, and overall financial stability. Recent examples from Chile, Asia, and Russia are presented. The effects of the growth of institutional investors for the nonfinancial sectors are addressed in Chapter 6. Saving behavior and international capital flows is the focus. Implications for policymakers are also presented. Particularly noteworthy is the lengthy treatment on corporate governance and institutional investors in the United States. Chapter 7 turns to the technology of trading. The advances in automated trade execution on the cost of institutional trading and on the whole securities industry are considered. In particular, the impact of automation on institutional trading costs is analyzed through a study of 5 years of trading data provided by a large (US$44 billion) mutual fund. The book concludes with Chapter 8, where institutional trading is examined in much greater detail. Trading costs are decomposed into components and measured. The effect on trading costs by different market structures (e.g. auction vs. dealer) is also analyzed. A look at the future is offered by projecting how institutional trading is likely to evolve in the coming years. The overall value of Institutional Investors is in its comprehensive examination of the institutional investment industry. The focus is not only on the United States but includes the major world markets as well. The material is not a summary in nature but extremely detailed with supporting data. The scope is not merely to describe the state of institutional investing
Book review
147
but to provide insight and explanation for how the industry evolved to the point where it is at and to offer convincing forecasts for where it is heading. Reinhold P. Lamb College of Business Administration, University of North Florida, 4567 St. Johns Bluff Road, South Jacksonville, FL 32224-2675, USA E-mail address: [email protected] Tel.: +1-904-6202630; fax: +1-904-6203861