The role of institutional investors in developing domestic capital markets and not only is well known in the economy. They support the financing process of different economical entities with deficits within the economy, providing long-term capital resources to the capital market. Therefore, they play a crucial role in the development of the country’s private sector. In this paper, the authors analyse the current situation of the institutional investors on the Romanian capital market and show their contribution to the economical development of a country from a theoretical point of view. The offered statistical information complete the general analysis made about the current position of institutional investors on the market.institutional investors, capital market, pension funds, investment companies

Corduneanu, Carmen

Milos, Laura Raisa

English

Research Papers in Economics

MARKET FORCE OF I STITUTIO AL I VESTORS O  THE 
ROMA IA  CAPITAL MARKET  
 
 
Carmen CORDU EA U 
Prof. Phd., West University of Timi oara 
Laura Raisa MILO  
Assist. Phd Candidate, Eftimie Murgu University Re iţa   
Romania 
 
 
 
ABSTRACT: The role of institutional investors
1 in developing domestic capital markets and 
not only is well known in the economy. They support the financing process of different economical 
entities with deficits within the economy, providing long-term capital resources to the capital market. 
Therefore, they play a crucial role in the development of the country’s private sector. In this paper, the 
authors analyse the current situation of the institutional investors on the Romanian capital market and 
show their contribution to the economical development of a country from a theoretical point of view.  
The offered statistical information complete the general analysis made about the current position of 
institutional investors on the market. 
 
KEY WORDS: institutional investors, capital market, pension funds, investment companies 
 
1.  I TRODUCTIO  
 
Once with the development of the domestic capital market, we can state that the role 
of the instituional investors in the  economy has even more increased,  contributing to the 
economical growth and supporting the real economy. Many initial public offerings (IPOs) are 
subsribed by such kind of investors, permiting in this way to the companies to develop in 
adequate conditions their production and investment projects. The short and long term bond 
market is also supported by th existence of the institutional investors, that look for this long 
term placements, and find the corporate, county and state bonds very attractive. Therefeore, 
the influence of instituional investors upon the development of the local capital market is 
obvious and canot be denied.  
 As  in  the  case  of  small  investors,  the  behaviour  of  institutional  investors  is  a 
subjective one. It is based on previous analysis and forecasts, and on the fact that they have a 
better  knowledge  upon  the  market,  lot  of  information,  abilities,  previous  experience  in 
managing their funds and securities on the market. For this reason, they are considered „the 
clever investors” from the market. Sophisticated and well informed, the institutional investors 
are the ones that establish the trends of the capital markets all over the world. We are talking 
about the market force of institutional investors in the current situation of Romania because of 
their strong growth over the time and of the fact that their presence started to be visible on the 
local capital market. 
  
2. THE CURRE T SITUATIO  OF I STITUTIO AL I VESTORS O  THE 
ROMA IA  FI A CIAL MARKET 
    
                                                 
1 Through institutional investors we understand the persons entitled to manage the portfolio of insurance 
companies, pension funds, mutual funds, financial investment companies, credit institutions. They are 
professional investors, their job being that of increasing the value of liquidities they manage. 2.1 Private pension funds 
 
First of all, the role of pension funds increased a lot, the effects being likely to be seen 
in the next period, taking into consideration the reform of the pension system. It supposed the 
introduction of two more pension pillars, along to the state pension, of fostering the private 
pension funds activity in their attempt of reaching a significant volume of compulsory and 
optional private pensions. The more and more intensive activity of private pensions funds is 
becoming more visible, considering the fact that the percent from the monthly revenue of each 
employee dedicated to private pension will increase gradually to 6% till 2016. This fact has a 
deep influence upon the domestic capital market. The experience of other countries that have 
implemneted such reforms in their countries show the potential big impact upon the capital 
market. The existence of the suplimentary two pillars represents a premise for the developing 
the activity of these pension funds, that will further look for investitional products in order to 
place their funds. Ineluctable, that will lead to a wider range of financial instruments on the 
capital market, an increase growth of the market liquidity and not at least, a deepening of 
financial market in general. In our opinion, the effects generated from the private pension 
funds are not yet significant  for the domestic capital market for two reasons. First of all,  the 
uncertainty climate and major capital losses registered on the capital market more recently, 
have released a certain reserve from the part of the persons in charged with the investment 
decisions,  being  more  cautious  in  their  approach  to  choosing  investment  instruments  and 
assume risk. Therefore, they’d rather invest in bank deposits or state bonds. On the other 
hand, these alternatives are preferred also because there is this politics at the level of the 
pension fund, that, in the first years, the majority of their assets ( > 70 %) must be placed in 
low risk financial instruments ( short and long term state bonds, bank deposits, fixed income 
securities), for prudential reasons and for covering the provisions and guarantees required by 
the  law.  On  contrary,  in  the  following  years,  managers  of  such  funds  choose  high  risk 
financial instruments, as equities listed on the domestic capital market that can offer higher 
yields
2.  
   Secondly, the effects are not so visible due to the fact that the third pillar, the optional 
pension market, has only celebrated its first year of functioning at the middle of the year 
2008, so the real growth will come up in some years from now. We can state the same thing 
about private administrated compulsory pensions. The assets accumulated so far are not so 
significant,  taking  into  consideration  the  fact  that  people  have  only  started  to  allocate  a 
percent  of their income in this direction. A more visible effect will be seen starting with 
2009, of course, if the capital market recovers from the current situation. The future impact of 
                                                 
2 According to the Surveillance Commision of Private Pension Funds System (CSSPP), a pension fund privately 
administrated can choose from the following financial instruments: a) money market instruments,  inclusive lei 
bank accounts and deposits at a Romanian bank or a foreign bank licenced to function in Romania and that is not 
under a special surveillance or a special treatment because of the lack of licence (<=20 % of total amount of 
assets); b) state bonds issued by Ministry of Economy and Finance from Romania or belonging to the European 
Union member states or the European Economical Space (<=70 % of total amount of assets); c) bonds and other 
securities  issued  by  local  public  administration  authority  or  by  the  member  states  of  European  Union  or 
belonging to the European Economical Space (<=30 % of total value of the assets); d) securities traded on 
regulated  capital  markets  of  Romania,  member  states  of  European  Union  or  belonging  to  the  European 
Economical Space (<=50 % of total amount of assets); e) state bonds or other securities, issued by third party 
states (<=15 % of total amount of assets); f) bonds and other securities, traded on regulated capital markets from 
third party states, issued by their local public administration (<=10 % of total amount of assets); g) bonds and 
other securities issued by  nonguvernmental  foreign organisms, if these instruments are quoted on approved 
capital markets and if they can accomplish the rating conditions (<=5 % of total amount of assets); h) titles of 
participation in mutual funds, issued by collective investment companies from Romania or other countries (<=5 
% of total amount of assets); i) other type of investment instruments according to the Commision. 
 private pension funds on the capital market will be an important one, fostering the companies 
to  finance  themeselves  from  the  capital  market  and  encouraging  the  appearance  of  new 
financial instruments on the domestic capital market, that could help managers of pension 
funds to diversify their portfolio. Practically, the private pension funds are an important part 
of the demand of financial instruments on the market. On the other hand, they contribute to 
the  quality  of  the  securities  listed  on  the  capital  market,  considering  tha  fact  that  they 
introduce the mechansims of corporate governance in the managament of listed companies , 
duet o the fact that they have a strong interest in making these companies as transparent as 
possible.  
 
2.2 Insurance companies  
 
In the category of insitutional investors, the insurance companies have an important 
part. Thier importance will grow even more in the future, emphasizing their potential role on 
the capital market. Their growth will be determined by: per capita growing of income, better 
financial education of the people, process of aging (increasing in this respect the demand for 
life insurance policies, alongside with private pensions), as well as developing the mortgage 
market (through the creation of suplimentary demand for estate insurance). There is a close 
connection between insurance companies and capital market. On one hand, according to the 
current legislation, the insurance companies can invest their assets in state bonds, current bank 
accounts  and  deposits,  tiltles  of  participation  in  investment  companies,  securities  (equity, 
bonds,  others)  or  even  real  estate,  all  of  these  combined  in  a  manner  that  the  insurance 
company does not suffer from any paying incapacity.  According to one order of Insurance 
Surveillance  Commision  (CSA),  the  aquired  financial  instruments  made  by  insurance 
companies on the capital market can be considered their liquid assets. The equities aquired by 
insurance companies will serve as a mean to cover the technical reserves of companies that 
practice general insurance. In other words, insurance companies could sell from the owned 
equity, obtaining realatively quick the necessary cash they need. In the same time, as a natural 
consequence of the financial innovation, as the financial market is becoming more and more 
mature,  the  insurance  companies  can  begin  to  assure  other  specicif  events  on  the  capital 
market,  like  for  example,  to  take  over  the  risks  associated  to  issuing  equity  or  bonds  by 
companies or the risks associated to interruption of the transactional system of the capital 
market. As a recognition sign of this integrating evolution of capital market and insurance 
market,  the  legislative  and  administrative  authority,  respectively  Romanian  National 
Securities  Commision  (CNVM)  and  the  Insurance  Surveillance  Commision  (CSA)  have 
concluded a common protocol that has as purpose the financial market surveillance.  
 
2.3 Investment companies 
 
Investment  companies  is  used  as  a  generic  term  for  defining  the  two  types  of 
investment  companies  that  coexist  on  the  Romanian  financial  market  (closed  and  open 
investment  companies).  They  have  reached  an  important  growth  over  the  time,  and  their 
importance seem to rise even more. As far as concerns the closed investment companies,  we 
have five financial investment companies (SIF) listed on the regulated capital market. They 
have been created as a consequence of the Mass Privatization programme, further listed on the 
capital market.  Their growth can be justified by the the fact that the placements made in such 
companies were proved to have high yields, a sum invested in 1999 in this kind of equity 
woulf have raised 40 times till present.  
An incentive for the growth of the five financial investment companies was due to the 
increase  in  the  level  of  ownership  threshold,  from  0,1  %  to  1  &  in  2005.  This  fact  has generated a growth of the five financial investment companies. Their cummulated net assets 
continue to grow, in the last two years registering even a 100 %  growth. This can be easily 
noticed from the table below:         
     
                  Table 1 
The current state of the financial investment companies on the capital market 
 
Financial  
investment 
company  
 et Asset  
(mill.RO ) 
 umber of 
issued 
equities 
Unit 
value of 
net asset 
 r. companies 
included in the 
portfolio 
  2007  Growt
h 2005 
(%) 
2007  2007  2007 
SIF Banat Cri ana  2.024  106 %  548.849.268  3,6892  368 
SIF Moldova  1.789  108 %  519.089.588  3,4468  265 
SIF Transilvania
3  2.764  162 %  1.092.143.332  2,5309  303 
SIF Muntenia  2.166  146 %  807.036.515  2,6843  241 
SIF Oltenia  2.756  112 %  580.165.714  4,7518  191 
(Source: computed by author on dates provided by www.unopc.ro) 
 
Alongside financial investment companies, in the closed investment companies also 
figure venture capital funds. Many local companies have been restructured and developed 
with the help of these kind of investment companies. Venture capital investment is generally 
made as cash in exchange for shares in the invested company, with the purpose of developing 
the business and gain a return over a period of time through an eventual realization event such 
as  an  IPO  or  trade  sale  of  the  company.  The  value  of  the  investments  realized  by  these 
companies has raised from one year to another in Eastern and Central Europe, reaching in 
2006 a three times bigger volume than in the previous year and in the same time a record of 
value. The volume of investments have increased especially in countries like Hungary, Czech 
Republic, Poland and Romania. More precisely, the volume of investments made by venture 
capital funds in Romania registered in 2006 a value of 110 millions Euro, a growth with 
approximately  58  %  since  the  previous  year,  reaching  the  fourth  position  in  the  general 
ranking  of  the  countries  of  Central  and  Eastern  Europe,  considering  the  total  volume  of 
investments.   
  Mutual funds, in their quality of open investment companies, have as main objective 
the growth in value of the managed total assets. The required financial performance has as 
purpose a superior yield, usually considering a benchmark (stock market index, for example).  
Depending on the type of mutual fund (monetary fund, bond orientated fund, equity orientated 
fund), it is established the specific strategy of investment, the range of financial instruments 
had in consideration and of course, the assumed risk. Despite the fact that Romanian mutual 
funds have developed lately (at the end of 2007, they had 265 millions Euro in net assets), in 
comparison with the other mutual funds from Central and Eastern Europe, their net assets are 
very low, as we can see in the figure below:  
                                                 
3 In the year 2007, SIF Trasilvania doubled its capital by incorporating rserves and distributing free equities. 0 5000 10000 15000 20000 25000 30000 35000
Poland
Hungary
Czech Republic
Slovakia
Slovenia
Romania
 
Figure 1 – Net assets of mutual funds from countries belonging to Central and Eastern 
Europe in 2007 (mill.Euro)  
 
3. CO CLUSIO S 
 
An important element for developing the domestic bond market and capital market in 
general  is  the  presence  of  powerful  institutional  investors,  with  a  long term  investment 
horizon  (pension  funds,  insurance  companies,  investment  companies).  Studying  more 
carefully in this article, the current situation of these investors, we can state that they have 
known a significant growth over the time and they should have a “market force” when talking 
about the capital market. Of course, the difficult period that the domestic capital market is 
passing through nowadays is influencing negatively upon these investors, just in a period 
when their presence on the capital market should have been felt in a serious way.  
 
REFERE CES  
 
Corduneanu, C. (2006), „Pieţe de capital. Teorie  i practica”, Ed.Mirton, Timi oara 
*** “Statistici” available on line at  http://www.bvb.ro 
*** “Statistici” available on line at http://www.unopc.ro 
 
 

Market force of institutional investors on the Romanian capital market

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