3 - INVESTMENT PLANNING (fin.) Flashcards
IPS should include
Investment objectives
- standard wording, growth, income, balance
-any specific goals
Client circs
- needs, restrictions, base currency, liabilities, residency
Risk profile
- set out risk profile, capacity for loss, attitude to risk, views on vol/drawdown
Liquidity reqs
- known liabilities, external cash
Time horizon
Tax position
-residency, tax wrappers, pension drawdown, losses carried forward
Investment strategy
- should be adopted to meet needs and set out - direct, funds, multimanager, cost, active/passive
- sentimental holdings/avoidances
Asset allocation
- permissible assets and target AA + any constraints
Constraints
- eg ESG reqs
Benchmark
Reporting frequencqy
Investment solutions
Funds = mutual funds or managed solutions
- return focused = income/growth/balanced. Meet or beat index
- risk targeted = vol constraints while maximizing returns
- multi manager = FoF or MoM
DPS - portfolio managed on behalf of client either with model portfolio or bespoke
Advisory management
XO - can provide a preferred fund panel for these clients
What are manager of manager and fund of fund strategies
FoF = assets invested in other collective funds to utilize the expertise of asset managers on each asset class
- one overall PM that invests in portfolio of other funds
- fettered FoF = invests only in funds managed by same group (reduced double charging and increased understanding of funds but a bit dodgy)
- unfettered FoF = invests in any funds - wider degree of diversification
MoM = assets managed by specialized managers in each asset class on segregated basis
- fund arranges segregated mandates and appoints FM they believe are the best
- usually large initial investment reqs
- long time to change disappointing manager
important for both
- what AA - conventional or HF/commodities too
- active vs passive vs blend
Advantages and drawbacks of MoM vs FoF
MOM
Gives access to instit managers retail usually wouldnt access
Can replace indiv if manager underperforms - dont have to sell units so avoids switching costs
Can be cheaper - instit tents to have lower fees
Portfolio can be over diversified turning into closet expensive tracker
May not be able to access best managers at other firms as they dont want PMs to be distracted whereas FoF can access whatever they want
Long time taken to replace disappointing manager whereas FoF can just sell
Discretionary investment managerment
For wealthy indivs = services vary widely
Manages portfolio without ref to client but within constraints of client’s risk profile and investment objective
Can be model portfolio with standardized portoflio around range of risk profiles
Bespoke - tailored to each indiv client
Advisory = for clients that dont want to give up decision making entirely - PM considers changes and then consults with client who has final authority
Centralised investment propositions
Model portfolios (MPS)/portfolio advise services = model portolio to meet investment reqs of client, often smaller amounts
DIM (in house or outsourced) - where advisor has input into strat
DIFs (distributer influenced funds) - typically OEICs where advisory firm exerts measure of control over fund and management - advisor gets comish for selling fund, potential conflict FCA doesnt love
FCA doesnt want one size fits all product
Steps in structured AA process for a client
- evaluate needs and ATR
- assumptions about future expected returns, risk, corr of asset classes
- select combo of assets that match objectives and risk profile to give min risk for expected level of return
- establish LT SAA - reflecting LT optimal mix of assets
- implement ST TAA - decisions against SAA backdrop
- periodic rebalancing to bring inline with SAA (tax and trans costs)
- reviewing SAA periodically to ensure continued suitability
SAA
Widely used approach is SAA with TAA overlay
SAA is
- relatively static
- usually set using proportions of externally recognised global BM
- peer group/fund compositions
- extensive risk/return numerical data
infrequently changed and reflecting a ‘neutral’ LT position
Usually managers given permitted range to operate within
diversified within and across asset classes
be suitable for client risk profile/needs/circs/time horizon/liquidity needs/liabilities/ESG preferences
TAA
Often used as an overlay to SAA - TAA considered relative to the long term strategic benchmark
Purpose = systematically exploit inefficiencies/temp imbalances in values between asset classed
chasing alpha by ow/uw asset classes from their LT SAA weight
taking advantage of short term market movements, developments
more frequently adjusted - monthly/quarterly
May use derivs to provide tactical overlays given the shorter time period - can deploy rapidly and cost effectively (cheaper and quicker)
Tactical bullish/bearish strategies
FI
Equities
Tactical
Derivs
TAA implementation is complex
Often TAA committee can be slow
Requires correct interpretation of noise
Active equity strategies
Active = careful selection/timing of investments - often mandated to beat index benchmarks using skilled analysis
Value investing
Growth investing
GARP
Momentum
Technical analysis
Fundamental analysis
Quant funds
Top down
Bottom up
Quality
Beta investing
Top down vs bottom up
Top down = assessing macro factors and using that as an input to AA and then stock selection
- economic growth, GDP, employment, business cycle, rates
Bottom up - strategy starts with unique attractions of individual stocks. benchmark agnostic
economy taken into account often as overlay
often there is a combination of the two
Value investing
- Focus on stocks that appear to trade for less than their intrinsic book value
- established comps, often cyclical, which have been underestimated by market (oversold/out of favour) so can purchase @ discounted price + should return to intrinsic val
- may focus on shares with low PE among other metics (low price/book, high book/price)
- provides margin of safety against further derating
- seek to avoid value traps where shares are cheap for a reason that can trigger permanent losses (may get sucked in with divi)
- belief indiv secs will revert to fundamental/intrinsic value + that market overreacts to bad news
- requires LT horizon usually for market to recognise stock is undervalued, ST underperformance can arise
focus on recovery/mean reversion differentiates from growth investing
Graham 7 tests for value investing
recs for tests to be carried out when stocks are identified for inclusion in defensive portfolio
ADEQUATE SIZE = smaller comps = susceptible to wider fluctuations in earnings so min size rec based on turnover e.g.
STRONG FINANCIAL CONDITION - current ratio of 2+, LT debt shouldnt exceed working capital to provide strong buffer vs bankruptcy
EARNINGS STABILITY = no losses reported in last 10y (maintenance of earnings implies some stability)
DIVI RECORD = history of 20+ years for assurance of future divi
EARNINGS GROWTH = to ensure profits keep up with inflation - net inc should have increased by 1/3 or more per share over last 10y
MODERATE PE RATIO = below 15x avg L3y earnings to safeguard vs overpaying
MODERATE PRICE/ASSETS RATIO = not >1.5x book value of assets
Growth investing
Focus on shares whose earnings are expected to grow in the future
- often smaller/younger comps poised to expand and increase profitability
- competitive adv with insulated earnings
- lower/no divi vs value as earnings reinvested
- look @ margins/ROE, share price perf, historical and future earnings growth
- often trade at higher PEs, higher risk and can have limited track record but potentially higher retirns
- Growth stocks will sell off if earnings expectations are missed as value is based on these future earnings so forecasts must be rigorous
GARP
Less aggressive than growth - reasonable PE is equal/below annual earnings growth rate = PEG ratio (PE/annual EPS growth) <1
- other protective valuation measures include divi cover, borrowings and liquidity
- combines tenets of value and growth to select indiv stocks w/ above avg earnings but excluding those too richly valued
Blend
Combines value and growth stocks or stocks with traits of both
Growth may have potench to exceed returns of market but more vol than value stocks - good when economy doing well
Value may outpace in certain economic conditions eg 2022, recovery periods etc
Blend investors can ow whichever style is in favour based on cycle
Arg against is that most successful FMs have had specific style
Income investing
Identifying comps that provide steady stream of income
- often have reached size that cant sustain large levels of growth so pay out earnings rather than retaining to fund growth
- can be prominent in certain industries eg utilitites
- sustainably high divi yield, steady predictable income streams, fundamental analysis to ensure divi growht
Momentum investing
Aggressive version of growth - focus on comps whose share price has been rising and who continue to gather momentum
- momentum investors profit from ST trades vs growth with is LT
- risk is upwards trend wont last forever, exiting early or late can erode returns
Fundamental vs technical analysis
Fundamental analysis = measures secs intrinsic value using publicly avail data. conc of macro and micro economic metrics
view to forecasting future profits and determining fair value/mispricings
Technical analysis = looking @ patterns of price and volume to anticipate market/directions
developing support and resistance price targets for secs
belief info is priced in so no merits in studying the fundamentals
self fulfulling as you reactively sell in response to sell signal and price declines
inverted head and shoulders pattern = bullish price pattern
Quality
Selecting comps with outstanding/clearly defined quality characteristics
both soft (management credibility) and hard (metrics, high ROE)
financially health with strong balance sheets
Low leverage (debt/equity), earnings stability, high ROE
strong financials, consistent earnings, a competitive advantage, and a solid track record
BENE AND LIMITS OF ACTIVE MANAGEMENT
Active = managing a portfolio to achieve greater returns than those of index benchmar
BENE
- can tailor strat to meet specific goals
- allows specialist investment strats
- have potential to generate better performance relative to benchmark index over time post fees
- investors have flexibility to choose assets that they believe will outperform
- many active managers are supported by big team of analysts = extensive research to find investment ops
DRAWBACKS
- better performance not guaranteed, can lag benchmarks
- many fail to beat benchmark consistently over long periods tho there are exceptions
- can be hard work and time consuming
- fees can be high which has compounding effect over time, an have exit and perf fees
- top managers can be selective as to who they take on and may have high initial min thresholds
- some actively managed funds are closet trackers
WHAT IS PASSIVE
BENE AND LIMITATIONS
Passive = No attempt to distinguish between secs/activeness/value/research - assets allocated across constituents of an index/representative sample. Passive because no decisions on securities made.
Based on belief it’s not possible to consistently beat index on a risk adjusted basis
BENE
- lower fees (reduced marketing, distro, accounting, investment costs) - ETFs mos popular
- liquid
- v transparant, clear which holdings are in portfolio
- frequently rebalanced, so investing in passives requires minimal trading
- wide variety of indices avail to suir broad range of styles
-common ETF structure means they are more tax efficient than mutual funds
LIMITATIOS
- when adjusting portfolios to reflect constituent changes, may end up over paying when buying and selling @ depressed prices
- less flexible
- cash drag and internal costs can effect perf and cause tracking error
- can be overly concentrated - vulnerable to political/regulatory events
- buy and sell decisions based on index not on research
cannot outperform index
- cash drag and internal costs can cause tracking error
Passive equity strats
Buy and hold
Indexation
- Duplication/complete
- stratified sampling
-Factor matching
- smart Beta
-optimization indexation
-synthetic indexation
Comingling
Impact of TE
index constituents changes = sec drops out of index and price falls as result, investors forced to sell and overpay for new additions
Could underperform an index due to this which is dangeorus since point of passive funds is to match index
can get -ve alpha after costs even tho same risks taken as market
Duplication/complete indexation
all constituents in exactly right weighting
no TE in theory but have to rebal and lots of trading costs
complicated and xpensive to yourself if too many constituents
Only suitable for very large portfolios
Why does full duplication index fund have TE/active share
Transaction costs that occur when constructing/rebalancing/changes in index comp/investing divi received
Timing of buying/selling stocks when they leave/enter index
Round lot purchase reqs which may mean difference in no. of stock in fund vs index
possible restrictions on foreign ownership if index is not domestic only
Change in price due to entering/leaving index - fund may trade after event
If index is TR - assumes ex divi date is payment date when it is usually weeks after
Cash drag - delay between when an ETF receives a dividend and when it uses the proceeds
Stratified sampling/optimization
To reduce costs - only sample portions of index from each sector
Lack of statistical analysis means method is subjective
Home/familiarity bias could create a problem - excluding new growth comps
essentially taking sector cross sections - hold sample of index that represents characteristics of index
based on key metrics like exposure, risk, and correlation
Can create bias towards stocks with best perceived growth prospects
Optimization = uses sophisticated modelling to find representative sample of secs that min the broad characteristics of index tracked
Smart beta
passively follow indices, while also considering alternative weighting strats such as volatility, liquidity, quality, value, size and momentum(not passive)
- e.g. equal weighted, low vol, divi focus etc
Goal of smart beta strats= generate alpha/lower vol/diversification @ lower cost vs trad active management
combines benefits of active and passive
smart b funds use rules systematic approach to choosing secs from an index
Smart beta
passively follow indices, while also considering alternative weighting schemes such as volatility, liquidity, quality, value, size and momentum(not passive)
Goal of smart beta strats= generate alpha/lower vol/diversification @ lower cost vs trad active management
combines benefits of active and passive
smart b funds use rules systematic approach to choosing secs from an index
Synthetic replication
FM enters into swap to exchange returns of index for payment
Samling used to identify optimal range of secs to be included
TE and rebal risk passed to counterparty - ETF generates exactly the performance of an index
Generally the loest cost method
Cash from investor purchase used to buy basket of collateral, variable returns of collateral swapped for returns of index with counterparty
unfunded vs funded swap model = funded swap model collateral does not have to track BM index and assets may be different (tho likely correlated)
Can have high TE vs physical
Useful more markets that are usually hard to access
Investor is exposed to counterparty risk - need to understand how this is managed
Risks of synthetic replication
counterparty
- synthetic ETFs rely on counterparty solvency, since they must be solvent to pay their side of swap to ETF provider
- intraday vol can lead to increased TE so can resetting of swap terms
collateral risk
- illiquid collateral may be hard to trade
- collateral will be subject to haircut and may not cover all of ETF assets in falling market
liquidity risk
- sudden large withdrawals may lead to FM being unable to meet redemptions
conflict of interest
- ETF manager and counterparty may be different arms of same institution
- concern if managers use ETF collateral as dumbing ground for hard to sell illiquid assets
funded swap model - basis risk = UL and deriv may not me moving in the same direction due to backwardation
Tracking error and reasons for occurrence
SD of the diff between the portfolio and benchmark return
Passive portfolios seek to replicate index returns = min TE
Optimisation = holding fewer stocks than index so can result in TE
Cash drag due to timing of divi payments - most indices assume receipt and reinvestment occurs before it actually does
Some indices harder to tracke.g. bond fund
Indices of less liquid markets/sec = more TE
Index fund may limit max allocation to indiv sec (so cannot replicate large domination of stock if over this)
How to assess index funds
UL index
- what components - any issues?
- total return or capital appreciation?
Strcuture
- physical or synthetic?
- how is optimization employed?
- level of TE?
- counterparty risk (for swaps and secs lending) - who is counterparty?
- quality and quant of collateral held
- leverage and complex strategies?
Tax
- fund domicile and UK reporting fund status
Costs
- OCF and transaction costs
- bid offer spread and brokers comm on trading
Dealing
- Level of liquidity
Level of dealing but auth market makers and any impact this had on spread
UK res non dom + remitittance basis
No UK tax on foreign income IF
- <2k per year
- dont bring any into the UK
If you do either = UK tax on worldwide income (may be double taxation treaty) or you claim remittance basis
Remittance basis - only pay UK tax on income/gains remitted to the UK
- still pay UK tax on UK inc/gains
GIVEN
- without charge and claim if unremitted inc/gains <2k or for minors
- with claim but without charge if res in UK <7/prev 9 tex years
-with claim + 30k if resi for >7/9 last TY
- with claim and 60k charge is resi for 12/14 prev years
LOSE BOTH INCOME TAX PERSONAL ALLOWANCE AND ANNUAL CGT ALLOWANCE IF CLAIMED
Tax efficient investment for non dom
Business investment relief
income and gains can be remitted to UK by non doms without giving rise to tax charge if invested in an EIS company within 45 days
When encashed, must take funds offshore within 45 days of will be liable to tax
Same relief as UK investor
UNFCCC
UN Framework Convention on Climate Change
UN process for negotiating an agreement to limit dangerous climate change
International treaty w/ >190 countries - parties to the UNFCCC are the COP (conference of the parties) meet every year to discuss issues
COP21
Nov 2016 - AKA Paris agreement
1st legally binding climate change agreement
Aims to limit global temp increases to 1.5C of preindustrial levels (primarily by reducing GHG emissions)
Ratified by almost 200 countries
Currently warming around 1.2C
COP26
Glasgow 2021
World leaders had to report back on progress made on previous commitments
+ submit more ambitious goals (Nationally Determined Contributions)
COP27
Dev countries contibute less to climate change but are more vulnerable to impacts - so will face greater risks
COP27 = non uniformity of temp rises was a key focus
Establishment of a loss and damage fund = compensation to vulnerable poorer countries
Responsible investing strats
Negative screens/exclusions = exclusion of certain secs/coms/practises based on specific ESG critera. Can be % revenue based
Positive/best in class = investment in sectors/comps based on positive ESG perf vs peers
Norms based screening = screening vs min standards of bis practise based on international norms
Integration of ESG factor = systematic and explicity inclusion of ESG factors into financial analysis
Sustainability themes investing = investment in specific themes e.g. clean energy, green tech etc
Impact investing = targetted, often private market investing aimed at solving social proplems - capital directed to traditionally underserved communities
Corporate engagement/activism = use of SH power to influence corp behaviour with engagement, proposals, voting etc
UN global compact
non-binding UN pact to get businesses and firms worldwide to adopt sustainable and socially responsible policies, and to report on their implementation
helps businesses
- do bis responsibly and align to ten principles on human rights, labour and environment
- take actions to advance broad societal goals e.g. SDGs
Greenwashing
Comps capitalizing on demand for ethical/resp products by rebranding themselves and jumping on bandwagon
advertising or marketing spin that deceptively uses green PR and green marketing to persuade public prods are environmentally responsible
organisation makes vague, misleading or even false claims about their product or operations and their subsequent environmental impact
False Claims:
Promoting products or initiatives as “eco-friendly,” “sustainable,” or “green” without solid evidence or verification.
Selective Transparency:
Highlighting minor eco-friendly aspects while ignoring significant environmental harms caused elsewhere in the business.
Misleading Labels:
Using vague or meaningless terms like “natural,” “green,” or “non-toxic” without certification or context.
Symbolic Actions:
Focusing on small, superficial environmental initiatives (e.g., planting a few trees) while neglecting broader harmful practices.
Complex Jargon:
Using technical or scientific language to confuse or distract consumers from the lack of meaningful action.
TCFD
Develops recs on types of info comps should provide to more effectively disclose climate-related risks and opportunities through their existing reporting processes
11 disclosure recs spanning 4 elements - governance, strat, risk management and metrics+targets
Global Reporting Initiative (GRI)
an independent, international orgthat develops a framework for organizations to report their ESG impacts
widely used standards for sustainablity reporting WW
Carbon disclosure project (CDP)
International non profit
- supports comps and govs to disclose their environmental impact
- - drives comps and gos to reduce GHG emissions, safeguard water resource and protect forest
- focused on climate change, water security, and deforestation
IFRS
Develops global accounting and sustainability disclosure standards through IASB and ISSB
Accounting standards are required in 140+ jurisdictions
B lab
Awards the B corp certificate to comps that meet high standards of social/environmental performance, accountability and transparency
B - beneficial
SDGs
Collection of 17 interlinked global goals adopted by all UN member states in 2015 - call to end poverty, protect the planet + ensure peace and prosperity for all by 2030
EU sustainability regs
SFDR = obj is to imporve transparency in sector concerning sust risks/impacts and to combat greenwashing so investors can make informed decisions about sustainability of their investments
- requires financial markets participants/advisers to provide prescript and standardised disclosures on how they integrate ESG factors
- publihsing of PAIs
- 3 product cats - article 6,7,8 (no integration, promote ESG, ESG main focus)
Antigreenwashing law banning generic environmental claims without proof + unaproved sustainability labels
UK sustainability regs
Climate related disclosures must be consistent with TCFD reqs by law
SDR - introduces specific sustainabilty related product labels and reporting reqs in attempt to increase transparency and reduce greenwashing
- restrict the use of certain sustainability-related terms in product names
US sustainability regs
2020 FTC Green Guides - include warning about blanket claims in advertisements/marketing + use of third party approvals/seals
China sustainability regs
2017 - green bonds regs - in response to difficulties for foreign investors investing in chinese secs due to lack of tranparency
introduced independent green bond verifiers
ESG ratings
Measure exposure to long term ESG risks
Multiple providers - mainly MSCI and Sustainalytics
Moodys and Fitch also provide
Use rues based methodologies to identify industry based leaders and laggards
tend to focus on how well companies manage their internal processes, rather than the real-world impacts of their products and services
Proprietary methodologies and lack of regs mean different providers can give same comp wildly different rating
Scope 1/2/3 emissions
Scope 1 = direct emissions from owned + controlled sources
Scope 2 = Indret from generation of purchased energy
Scope 3 = All other indirect emissions not included n scope 2 but that occur in value chain
Faith based investments
Incorporate specific religious values into investment criteria - a kind of value driven investment
Islamic capital = big portion of faith aligned capital due to prohibition of interest and avoidance of gambling/alk/arms
Ethical indices
FTSE4GOOd = measure perf of comps that meet globally recognized corp responsibility standards
(globa, Euro, US, Japan, UK)
Dow Jones Sustainability Index = tracks financial perf of leading sustainability companies worldwide
KTSE KLD 400 Social = S&P screened for ESG factors
MSCI Low carbon index = number of global equity indices based on main market cap indices
Philanthropy and qs to ask
Form of investing that lies at extreme beyond ethical investing - often seeking no financial return (could be a straight donation)
- what do you want to achieve with activity
- what type of org do they want to support/does one exist
- donations or be involved with cause
- how to measure effectiveness
- donate directly or establish charitable trust
- estate planning arrangements if any
- how much do you want to invest
-understanding of philanthropy - return or donation
- now or on death
- lump sum or regular payments
- do you want recognition
Impact investing
Investing to generate a positive environmental or social impact alongside a financial retrim
Often consider the positive/beneficial impact of investment as part of overall return (non financial benefit/return)
may target returns from a risk adjusted market rate to below market returns (concessionary return impact investing)
CClient order record requirements
- Name and designation of the client.
- Name and designation of any relevant person acting on behalf of the client.
- A designation to identify the trader (Trader ID) responsible within the investment firm for the
investment decision. - A designation to identify the algorithm (Algo ID) responsible within the investment firm for the
investment decision. - Buy/sell indicator.
- Instrument identification.
- Unit price and price notation.
- Price.
- Price multiplier.
- Currency 1.
- Currency 2.
- Initial quantity and quantity notation.
- Validity period.
- Type of the order.
- Any other details, conditions and particular instructions from the client.
- The date and exact time of the receipt of the order or the date and exact time of when the decision
to deal was made.
COBS trade confirmation reqs
= legal contract between two counterparties
Name of the firm.
* Name or designation of the client.
* Trading day.
* Trading time.
* Type of order (for example, a limit order or a market order).
* Venue identification.
* Instrument identification.
* Buy/sell indicator.
* Nature of the order if other than buy/sell.
* Quantity.
* Unit price.
* Total consideration.
* Total of the commissions and expenses charged.
* The rate of exchange obtained where the transaction involves a conversion of currency.
* The client’s responsibilities in relation to the settlement of the transaction, including the time
limit for payment or delivery as well as the appropriate account details where these details and
responsibilities have not previously been notified to the client.
* If the client’s counterparty was the firm itself, the fact that this was the case unless the order was
executed through a trading system that facilitates anonymous trading.
often DIM include in their T&Cs that indiv trade confirmations wont be issued + instead issue periodic statements
Periodic reporting
If firm manages retail investor money - must provide regular reports to client on portfolio
- investment valuations
- perf reports - including vs BM
- transaction reports - details of trades + costs
- corp action statements - over period
- cash and income reports - cash transactions + interest received
- tax reports - annual tax pack, CGT report + divi/interest income
-deriv reports - collateral value, UL, strike price, market val of contract
Must be issued every 3m except where there is online system where client can access up to date vals
if service permits use of leverage - reporting must be monthly
advisory = at least 6m reporting
Investment valuation content
Holdings
- NV of stock/number of shares/units
- whether any shares are partly paid
- NV of bonds with maturity dates
- details of any open positions in XT or OTC futures/options
VALUATION
- price for each investment and price basis
- exchange rate for investments not quoted in base currency of portfolio
- how prices are estimated for illiquid holdings
ANALYSIS
- breakdown of portfolio by asset class, market, sector
Benchmark reqs
COBS requires meaningful method for evaluation/comparison based on investment obj of client and types of instrument included in portfolio
against which to assess performance
Specificed in advance
Appropriate to manager style
Measurable
Unambiguous
Regularly reported
Appropriate to currency of portfolio
Investable
3 ways to assess perf
Comparison with relevant index
- clear indication of return vs BM index
- many sub indices for precise comparison
Comparison with similar funds/universe
- measuring vs other FMs or portfolios with similar constraints
Comparison with custom benchmark
- often developed for funds with unique investment objectives
- useful when fund spans several specific asset classes
Types of index weighting
Price weighted
- components weighted according to each share price (assumes equal number of shares held in each company)
- difficult to justify and interpret
- DJIA
Market cap weighted
- weighted according to total market cap/value e.g. FTSE100
- often free float adjusted
Equal value weighted
- Certain markets - dominated by largest constituents = conc risk and can be misleading
- assumes equal amounts invested in each constituent
Types of benchmark
Absolute return
-obj to exceed min target return, e.g. rolling 3 year target, SONIA + x%
Manager universe
- peer group averages - cannot be specified in advance to criticized due to herd mentality encouragement
Broad market indices
- well recognised, easy to understand. May not match investor style
Style indices
- portion of avail secs within category that can be grouped e.g. large cap stocks
Factor models
- uses one or more synthetic sources of returns of the benchmark e.g. sector, size etc
- ambiguous, expensive, not specified in advance and hard to understand
Custom
- uses selection of secs that reflects IMs approach/AA
- maybe multiple indices
WealthTech
Broad cat of services embracing emerging tech to reinvent the wealth management sector
Give users the tools to deal with finances more directly (e.g. apps on phone)
Capital obviously at risk
gamification of investing
Not understanding the level or risk or the lack of regulation of investments
Robo advisors
Robo advisors = main subgroup of wealthtech = digi platforms that provide automated, algo driven wealth management services with little/no human supervision
- require low inital investment
- charge low fees (<50bps)
- allow more people to enter market (particularly young/tech savy)
Wealthfront = automated investment service firm based in Palo Alto, 50bn AUM
Betterment = American financial advisory company which provides digital investment, retirement and cash management services. 45bn AUM
Nutmeg = UK based online DIM company primarily uses ETFs to invest
Due to scepticism some robo advisors offer hybrid human/robo advice
Crypto
- digital currencies that op on decentralized blockchain tech
- blockchain = A distributed ledger that records transactions across multiple nodes, ensuring transparency, immutability, and security of data
- lack intrinsic value or cash flows, making valuation speculative and influenced by supply-demand dynamics, market sentiment, and adoption rates
- Creation of cryptos post GFC as a way for people to control own finances
Bitcoin 1st created in 2009 - now over 12k currencies
cryptocurrency is typically decentralized digital currency designed to be used over the internet
risks
- regulatory uncertainty, price volatility, cybersecurity threats, scalability issues, and environmental concerns (e.g., energy usage for mining).
STOs and ICOs
ICO = initial coin offerings
STO = security tokn offerings
Regulator compliant STOs appeared after the death of ICOs in late 2018 to revamp confidence in crypto
ICO = was popular way to raise funds with crypto for start ups pre 2018 initally involving launch of new currencies.
Most ICOs used offered tokens using Eth which crashed in 2018 = big SEC investigation and no confidence
‘coins’ refer to cryptocurrencies that have their own blockchain, while
‘tokens’ refer to cryptocurrencies built on top of an existing blockchain.
STO demand is increasing - offers alternative to trad mainstream debt and equity finance
Crypto exchanges
Trading platform to buy/sell/trade crypto
Way to purchase bitcoings for fiat currency or other currencies and hold them in digi wallets (without mining)
Some exchanges are more transparent than others - unclear which regulatory regime Binance operates in
- centralised = liquid, user friendly, susceptible to hacking
- decentralised = uses smart contracts, more private, less liquid, complicated, limited fiat integration
- hybrid = combines centralised liquidity and effiiciency with decentralised control
DeFi
emerging peer-to-peer financial system that uses blockchain and cryptocurrencies to allow people, businesses, or other entities to transact directly with each other
Crypto doesnt offer income streams like trad assets
DeFi schemes enable owners to lend out assets in return for renumeration AKA Yield Farming
Usually takes place on unregulated, decentralised exchanges
Underlying codes may have significant security liabilities
Most crypto thefts take place on DeFi platforms
NFTs
- unique digital assets that use blockchain tech to represent ownership of a specific item, typically digital or tokenized real-world assets
- Unlike cryptocurrencies - NFTs are non-fungible, meaning each token is distinct and cannot be exchanged on a one-to-one basis
- most cannot be divided into smaller units
loan based crowdfunding + risks?
crowfunding = popularized following GFC - way of financing debt through raising via from a large no. of people
loan based aka P2P lending= consumers lend to bis directly for interest payment and repayment of capital over time
- bypasses traditional banks
- returns are financial
-primarily for profitable SMEs, not really suitable for startups
Risks
- no FSCS recourse
- may have difficulty cashing in (some platforms do have 2ndary market tho)
- capital at risk
investment based crowdfunding+ risks
consumers invest in comp by buying shares or debentures (which act like bonds)
- can also refer to mini/crowd bonds which is a way investors lend directly to bis (not allowed to sell to retail investors)
Risk
- high risk - very high potential for loss of capital funding entrepreneurial endeavours - may lose 100% of investment as most start ups fail
- may have little recourse in case of default/fraud
- dilution risk as likely multiple rounds of funding
- long investment periods
- risk platform could fail or become insolvent
- secs not transferable, most platforms have no 2ndary market - difficult to cash in early
lending platforms for loan based crowdfunding
UK = Funding Circle
Fuding Circle - 2010
- P2P crowdfunding platform , listed in 2018 on LSE
- enables investors to lend to small comps - mechs have changed over time
- used to allow retail investors to pick who they lent to - suspended this in 2017 citing lack of diversification and risk to retail investors
equity crowdfunding
Crowdfunding refers to raising money from the public (i.e., the “crowd”), primarily through online forums.
Equity crowdfunding = In exchange for relatively small amounts of cash, public investors get a proportionate slice of equity in the business venture
e.g. Seedrs and crowdcube
online platforms allow people to invest in a bis in exchange for equity
can also provide non mainstream options e.g. Yielders - UK Shariah compliant platform enabling investment in real estate via SPVs
cons
- often bis v early stage and investment is risky
little recourse in case of fraud
dilution of investment as more shares are issued - startups undergo multiple funding rounds
long time to return on investment - bis takes which to generate income
securities not transferable (tho Seedrs has a secondary market)
