Data Crunch: Retail and institutional – two very different investment worlds

The institutional market consists of assets managed by defined benefit pension funds, insurance companies (general accounts, not unit-linked), asset managers and subadvised (where one asset manager uses another’s product or service), and official institutions. Defined contribution workplace schemes also fall under this heading.

Institutions have plunged headlong into multi-asset solutions, while private investors are still probably more than 80 per cent invested in single asset class structures

In the UK, the total assets managed for these institutional investors by third-party unaffiliated managers is £1.8tn, and the bulk of this is in DB pensions. Fixed income, equity and liability-driven investment assets represent 24 per cent, 18 per cent and 40 per cent respectively, if you include the value of the derivative notional exposures in LDI.

Since 2015, there have been positive flows of assets subcontracted to third-party managers every quarter bar two, with an uptick to £18bn in Q1 2017, from -£3bn in Q4 2016.

There is a temptation to think that the second layer, the fund market, is the ‘retail’, or ‘retail and wholesale’, equivalent to institutional. Retail, in this context, is the market consisting of those firms that select or buy investment products for individuals.

This ranges from family offices, private banks and wealth managers, through to networks of independent financial advisers and others, such as banks, that manage or buy assets for their clients.

Yes, funds (both domestic funds and ‘cross border’ or Ucits) are the most frequently used vehicle for private investors, but it does not follow that all funds are bought for retail investors. Because of course institutions use funds, and in large volumes – we think that around 30 per cent of the UK institutional assets described above are in funds.

Having said all this, the fund market is a proxy to a large extent for retail activity. So, by comparing the two markets we can make some broad generalisations about ways in which institutional investors behave differently to individuals.

Institutional is much larger, and invested in quite different ways. Of the assets that institutional investors ask third-party managers to look after, 18 per cent is in equity.

The equivalent for individuals is possibly three times this. Institutions have plunged headlong into LDI and other multi-asset solutions, while private investors are still probably more than 80 per cent invested in single asset class structures.

By coincidence, a net £82bn has flowed into each of these two markets between the first quarter of 2015 and the second quarter of 2017, ‘net’ meaning the difference between gross inflows and outflows in each period.

The shape of the incidence of the flows has some similarities, with significant upticks in both markets in the fourth quarter of 2015. Both appear to be in a similar upward trajectory today.

But apart from this, the fund flows follow the shape of stock markets much more accurately, while institutional flows have significantly less relationship to market movements. Hardly surprising, given the asset allocation shown above, where it is clear how much less equity is held in third-party institutional assets.

We often hear that the retail and institutional worlds are merging, and in many ways they are, but this brief analysis shows they remain different in many ways.

Magnus Spence is managing director, global market intelligence at research company Broadridge