The financial industry sets sights on institutional investors: a relational approach to property investment outsourcing

Abstract

Over the past few decades, pension funds have emerged as major players in global financial
markets as the reserves they manage have grown steadily. In this context, trustees are confronted with acute dilemmas regarding how best to generate investment returns to beneficiaries.
This involves crucial decisions regarding the diversification of investment portfolios, as well
as decisions on whether, when and to whom to outsource investment functions and tasks. The
literature in economic geography has frequently treated outsourcing decisions as taken by the
asset-owners based on criteria such as costs of coordination, availability of information regarding
market segments, governance structure, (lack of) internal expertise, amount of assets under
management, etc. Focusing on the outsourcing of property investment by Brazil’s largest pension
funds and drawing on a relational approach, this paper investigates the actions taken by
the REIT industry to attract and retain pension fund money into their investment vehicles. It is
claimed that REIT managers have acted on three dimensions to capture pension fund money:
1) by influencing the regulatory framework affecting pension funds; 2) by building networks
of trust with pension fund managers and trustees; 3) by adapting internal procedures to the
expectations and needs of institutional investors. Our results show that a focus on the power of
financial market actors to reshape relational networks to their benefit provides a different perspective
on the reasons pension funds outsource investment management, thus raising key theoretical
and policy issues.
Keywords: Pension funds; Real