7. Active vs Passive Investment Flashcards
What does ‘market to market’ mean? What is the marked to market value of funds often referred to?
Mark to market is an accounting practice that involves adjusting the value of an asset to reflect its value as determined by current market conditions (current market value). The market value is determined based on what a company would get for the asset if it was sold at that point in time.
When the assets held within an investment fund are marked to market, their current market values are used to calculate the Net Asset Value (NAV) of the fund. The NAV represents the total value of the fund’s assets minus its liabilities, and it provides a snapshot of the fund’s current value. NAV is typically calculated on a per-share or per-unit basis and reflects the fund’s value for that specific moment.
How do fund management fees vary across investors and fund types?
Management fees are lower for institutional investors than for retail investors (e.g., because of higher investment amount). This fee is also lower for ‘passive funds’ that track a benchmark index than for ‘active funds’ which pursue a stated investment strategy.
What are some examples of fees charged by investment funds?
Management fees
Transaction fees (fee for buying or selling shares in fund)
What are closed-end funds?
CEFs are actively managed funds that provide a one-time offering of a limited number of shares in the fund (IPO). Once the shares are sold the offering is closed. Investors who wish to realise their investment cannot sell their shares back to the fund but can sell their share in the fund to other investors on the secondary market. CEFs can trade at substantial premium or more often discount.
What are open-end funds (mutual funds)?
Funds that issue an unlimited number of shares and allow investors to withdraw. They are priced at NAV per share (which is calculated at the end of the day (as opposed to price fluctuating throughout the day like with assets on public markets)). They are only sold on primary markets (directly traded and priced by fund). To sell shares in OEFs, sufficient assets of the fund are sold at the current mark to market value to repay the investor the value of their share in return for relinquishing ownership.
Which funds cannot be marked to market?
Funds invested in private equity (private equity funds) such as leveraged buyout funds and venture capital funds. As their assets are not liquid assets traded in public markets.
What is an index?
An index is a group of securities or other financial instruments that measures the performance of a market, asset class, or investment strategy.
What are two important uses of benchmarks/indices?
- To help investors measure/evaluate the performance of investment funds or other investment strategies and so decide which ones to pursue.
- To support passive investment management, in which a portfolio is adjusted to track a benchmark, i.e., keep as close as possible a composition in the investment portfolio as the benchmark.
What are advantages of passive investment?
Passive investment allows investment management to be conducted mechanically, and thus to be pursued with relatively low fees.
What is an investment trust?
A limited public company (thus acts similar to CEFs), which actively manages a portfolio of many assets such as equities, commodities, fixed-income securities, or real estate.
What is a passive exchange-traded fund (ETF)?
Investment funds traded in secondary markets that passively track an index (e.g., S&P 500) and thus are often very diversified and offer broad exposure.
What are reasons for choosing passive ETFs over passive mutual funds?
ETFs are the cheapest and most liquid way to pursue a passive investment strategy (with continuouly quoted prices and low transaction costs).
