42% of daily trading in the Taiwan stock market in 2019 is traded by institutional investors. Getting to know these institutional investors and how to differentiate these various funds has become an important practice for listed companies and its IROs. Getting more familiar with these institutional investors will help IROs better understand investors’ investment approach & style, time horizon, or in some cases, their expected return. This also helps IROs to perform investors targeting, identify and attract the right kind of investors in order to better maximize long-term shareholder value.
What are institutional investors?
An institutional investor is an entity or organization that buys and sells securities on behalf of a group of individuals. The institutional investor pools money from various individuals which is then further provided to investment managers who invest the money in various portfolios of assets. In Taiwan, some of the most common institutional investor includes entities like insurance companies, banks and financial institutional funds, mutual funds, hedge funds, and pension funds. These institutional investors typically invest in large enough quantities to qualify for preferential treatment, such as lower commissions, brokers’ resources, and faster execution speed. An institutional investor typically brings the benefits of participation to investors who lack the resources to access larger financial markets. For this reason, institutional investors play a critical role in how markets behave and how assets are priced. Here we introduce the 7 most common institutional investors we see in Taiwan.
Mutual funds
Mutual funds are the most well-known type of institutional investor. A mutual fund is essentially an open-ended investment firm that pools money from individual investors into one fund managed professionally by a portfolio manager.
Investments in a mutual fund tend to be well diversified and provide investors protection in case a particular security underperforms. At the same time, mutual funds charge management fees to every scheme which is deducted from the client’s account. In general, mutual funds are long-funds that buy and sell equity-investment.
Mutual funds can also be diversified through active management and passive management, even though we typically think of mutual funds as actively managed funds that employ stock pickers whose goal is to beat the market’s performance. Passively managed funds can be index funds or ETFs (exchange-traded funds) that track an index.
Due to the rise in quantitative investing, there are also quantitative mutual funds where a portfolio manager selects stocks through computer-based quantitative methods that involve stock screening, buying/selling algorithm, or other disciplined risk management.
Some well-known actively-managed mutual funds that invest in Taiwan include Fidelity, Invesco, Schroders, Alliance Bernstein, and Allianz Global Investors. Well-known passively-managed mutual funds that have a presence in Taiwan include The Vanguard Group, BlackRock, and Dimensional Fund Advisors.
Hedge Funds
Hedge funds are a type of institutional investor that uses pooled funds to generate above-market returns. The fund usually consists of a limited partnership of investors that utilizes high-risk methods or investment strategies to generate large capital gains. In general, hedge funds are only available to accredited investors, but also may be available to high net worth and individual investors. Hedge funds often invest mostly in liquid assets and tend to invest in securities with a shorter time horizon. Although in many cases hedge funds may also hold a long or short position for a longer period of time if it takes on a longer view. The most important characteristic of hedge funds is that it often takes a long and short position or a hedged position in securities. They also use numerous other risk management techniques for neutralizing the risk and maximizing their profits.
In recent years, many hedge funds have been deploying quantitative investment strategies, selecting investments by using sophisticated mathematical models that help to generate absolute return.
Well-known hedge funds that we may see invested in Taiwan equities are Och-Ziff Capital, Millennium Management, and Point72. Some of world’s most famous quantitative hedge funds include Renaissance Technologies, Two Sigma, D. E. Shaw, ARQ Capital, and etc.
Pension Funds
Pension funds are funds that pay for employee retirement commitments. The pool of funds usually consists a portion of an employee’s salary into a retirement portfolio, with contribution made by employees, employers, or both. Pension funds are then invested on the employee’s behalf, and the gains on the investments generate income to the employee upon retirement. Therefore, pension funds need to be prudently managed to ensure that retirees receive promised retirement benefits. Typically, equity investments in blue-chip common and preferred stocks are a major investment category for pension funds. However, in recent years due to the search for higher return, some fund managers will invest in small-cap growth stocks with dividends. There are many types of pension funds, including national, corporate, public and union. Some of the world’s largest pensions funds actually backed by sovereign wealth funds.
Some of the most well-known pension funds invested in Taiwan include Norges Bank Investment Management, California Public-Employee Pension Fund (CalPERS), Taiwan Labor Funds, and the Government Pension Fund Investment Japan (GPIF). Some of these larger funds such as CalPERs, have their own investment team managing their portfolios. Others, or smaller pension funds are likely to seek outside management.
Sovereign Wealth Funds
Sovereign Wealth Funds are state-owned investment funds that consist of money pooled from a country’s reserves. Each sovereign fund has its own unique reason for its creation and their own objectives. Some of the common objectives may include to protect & stabilize the economy, increase savings for future generations, or sustainable long-term capital growth and support local developments. Some of the sovereign wealth funds that we see in Taiwan equities are GIC, Abu Dhabi Investment Authority, and Korea Investment Corporation.
Insurance Companies
Insurance companies are an institutional investor that invests the premium paid by their customers to grow their profits and pay for coverages against all forms of losses. In general, insurance companies invest in equities that are larger caps and less risky. However, they could also invest in small-cap companies with solid cashflow and steady dividends. The major insurance companies in Taiwan are Cathay Life Insurance, Nanshan Life Insurance, and Fubon Life Insurance. In many cases, these insurance companies are some of the largest shareholders of a listed company.
Banks and Financial Institutions
Banks and financial institutions such as commercial banks, private banks, brokers and post offices are also institutional investors. Global banks such as JPMorgan Chase, UBS, Credit Suisse, HSBC will invest in equities, some will even hold on behalf of their beneficiary clients. These financial institutions also have proprietary trading or (prop trading), as they use the firms’ capital and balance sheet to conduct self-promotion financial transaction. Prop desks’ equity investments are usually speculative in nature; therefore, their investment horizon tends to be short.
Private Equity Funds
Private Equity funds are pooled investment fund with a structure of a limited partnership and a fixed fund life. These funds typically provide equity financing to private companies that are unable to raise capital from the public, or up and coming companies in which they see huge hidden potential. In many cases, private equity funds also help to buyout a listed company taking it into private ownership in order to restructure it before selling or listing it again for higher profits. Some of the well-known private equity funds that have appeared in Taiwan include Temasek, Carlyle Group, KKR, Oaktree Capital, and Baring Private Equity Asia.
The Bottom Line
Institutional investors will continue to play an important role in Taiwan’s equity market and will remain the single biggest driving force in term of trading volume. Getting to know these institutional investors will better help companies and its IROs to identify and target prospective investors globally that could have a positive impact to the company’s valuation.
QIC advisors consist of experienced professionals that have worked in major sell-side and buy-side companies for many years. By leveraging our proprietary database and research, we help companies to identify, prioritize and qualify institutional investors globally. If you are interested, please reach out to us and discover ways we can help with your investors targeting.
Contact: yvonnehuang@qtumic.com