Ask Fear and Greed: Retail vs institutional investors?

What’s the difference between a retail investor and an institutional investor - and who gets the better deal?

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Episode Transcript

Speaker 1 (00:03):
Welcome to Ask for Fear and Greed, where we answer
questions about business, investing, economics, politics, and more. I'm Adam
Lang And Hello, Sean Aylmer, Hello Danski. All right, Sean,
it's a ripper. Today's question retail investors.

Speaker 2 (00:18):
All right, they're a ripper every time. What are you
talking about? You're quite right, you're a bit cynical like
Michael at times.

Speaker 1 (00:25):
Well, I love this one, especially what's the difference between
a retail investor and an institutional investor? And Sean, does
either one of them get a better deal?

Speaker 2 (00:37):
So, taking a line from you and Michael, I'm going
to be cynical on this, okay. Retail investors spend their
own money. Institutional investors spend someone else's money, which is
actually factually true. Retail investors are individual investors who buy
and sell assets, let's say stocks, for their own personal accounts,

(00:58):
typically in smaller amount. Normally they use some sort of
brokerage firms their own hard earned can that's it, Mum
and dad investors we call them mostly that's right. There's
institutional investors, their organizations, super funds, hedge funds, insurance companies.
They invest on behalf of their clients or members, often
with large sums of money. There are different rules, corporate

(01:23):
rules applying to each. There's also a group in the middle,
sort of family officers, high net worth individuals fall somewhere
in between. There are certain rules for them as well.
So they're the three types tiers, the three tiers of investors.
But let's stick with retail and institutional. The question is, well, actually, mean,

(01:47):
some retail investors can act like an institutional investor because
they can buy managed fund. So if you want to
get in private credit, okay, yea, at the moment, it's
hard for a retail investor unless you're really rich to
buy into private credits. You can go into a managed fund.
You can also go into a fund which provides credit
services to borrowers, so you can sort of help fund that,

(02:12):
but mostly you go into a managed fund. So who
does better? Which is kind of the key for question.
So few retail investors, I would say, are as informed
as institutional investors. Institutional investors spend all day every day

(02:33):
doing this looking after their money. They have better access
to management, better access to boards. At the smaller end
of the market, maybe some retail investors get that sort
of access particularly if they're investing quite a bit of money,
but mostly institutional investors, they should outperform because they have
more access to management information. Theoretically, all share held as

(02:57):
are treated equally, so everyone should get the same information,
but I just don't think that happens in practice. It's
really relevant at the moment because according to Bloomberg Intelligence,
and these are on US numbers, the Australia would reflect
that retail investors now make up about twenty five percent
of the market. Okay, that's big, it's huge, it's huge.

(03:19):
It was ten to fifteen percent before the pandemic. Oh wow.
Now these numbers are from twenty twenty three. They may
have come off a bit. But the fact that they
are more individual investors participating, you really hope that they've
got kind of risk management in zinc. They understand what
they're investing in. I don't know whether that's the case.

(03:40):
According to a study by a group called delbar Inc,
the average retail investor underperformed the S and P five
hundred unperformed the S and P by five hundred by
six point one percent annually over a twenty year period.
That hurts, Yeah, that does hurt. There was a big

(04:00):
gap in twenty twenty three, which basically that's a bullmarket
twenty twenty three, so there's this theory that you can
jump in and get be part of the bullmarket. But
the gap was huge in twenty twenty three, so it
showed that institutional investors were in their first and retail
investors were chasing. According to the report, because investors tend
to sell out investments during downturn so most of the

(04:23):
gap comes from investors selling out of investments during downturns
and missing out on the rebounds. And if you're an institution,
you've got a lot of money, you can hold the losses.
Individuals can't do that as much. They tend to panic,
they sell out, and they don't get the rebound. So
the difference spending their own money for someone else's money.

(04:46):
Rules are different for each of them. There's also this
middle group behind it with individuals, family officers, that type
of thing. I think they're called sophisticated investors is the
term they'd like to years. Generally, the research suggests that
institutional investors do better than retail investors, and intuitively that
makes sense.

Speaker 1 (05:04):
Well played, Sean, thank you, thank you, Adam If you
have your own question for Fear and Greed, jump onto
the website Fearangreed dot com dot au or send it
through on any of the social media platforms. I'm Adam
Lang and this is asked Fear and Griet