Institutional Investors: From Myth to Reality
June 1, 2015Risk Management and Vulnerability

Sergio Schmukler will explore what we know about how institutional investors impact long-term financial development and international asset allocations.

Policy makers around the world have promoted institutional investors as a way to develop financial systems, manage long-term savings, expand maturities, increase access to finance for corporations, diversify risk, and reduce vulnerabilities to crises, among many other things. In fact, the assets held by institutional investors have increased significantly over time and, by now, they have become at least as important as banks in several countries. Still, the impact they have on long-term financial development and international asset allocations (and capital flows) remains to be understood.

New research suggests that institutional investors behave very differently than expected, and that the incentives faced by managers tilt portfolios in ways that, a priori, appear counterintuitive and difficult to comprehend. For example, mutual funds invest in a very limited number of assets when investing internationally, tend to herd in their investment choices, and behave pro-cyclically during crises, contributing to the transmission of shocks across countries. Moreover, mutual and pension funds invest mostly in short-term assets. Benchmark indexes have important effects on how capital is allocated across countries and firms, irrespective of fundamentals.

The evidence suggests that the behaviors lie in the way the industry is organized and in agency problems that push managers to invest short-term in liquid assets. Funds are available for investment but they do not flow to many companies and countries or to assets with longer maturities. Pushing investors to behave differently would entail important trade-offs between short-term monitoring and risk taking. 

Last Updated: Jun 02, 2015

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    Sergio Schmukler, Lead Economist

    Sergio Schmukler is a Lead Economist in the World Bank’s Research Department. His research areas are international finance and international financial markets and institutions. In particular, he works on emerging market finance, financial globalization, financial crises and contagion, financial development, and institutional investor behavior. Schmukler obtained his Ph.D. in Economics from the University of California at Berkeley in 1997, when he joined the World Bank's Young Economist and Young Professionals Programs.
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    Asli Demirgüç-Kunt, Director of Research

    Asli Demirgüç-Kunt is the Director of Research in the World Bank. After joining the Bank in 1989 as a Young Economist, she has held different positions, including Director of Development Policy, Chief Economist of Financial and Private Sector Development Network, and Senior Research Manager, doing research and advising on financial sector and private sector development issues.
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    Roberto Rocha, Senior Adviser, Middle East and North Africa, World Bank

    Roberto Rocha was a young professional at the IMF and transferred to the World Bank in 1985, where he has been since then. In his career in the Bank, he has been involved in extensive research and operational work in the areas of financial sector development, bank and enterprise reforms, and pension reform. Before taking on the role of Senior Adviser in the Finance and Markets Global Practice, Rocha worked as the Senior Adviser for the Middle East and North Africa Region, where he led the financial sector flagship, a comprehensive stock-taking report of financial development in the MENA region.
  • The Policy Research Talks showcase the latest findings of the research department and their implications for World Bank operations. The goal of the monthly event is to facilitate a dialogue between researchers and operational staff, so that we can challenge and contribute to the World Bank's intellectual climate and re-examine conventional wisdom in current development theories and practices.
  • Date: June 1, 2015
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