Chapter 4: Collective Investments Flashcards
What’s the difference between direct & indirect investment?
Direct is where an investors buys shares in a company, indirect is where an investor buys a stake in a collective investment vehicle e.g. a mutual fund.
What is a mutual fund?
It is a collective investment vehicle that a number of people invest into to create a pool of funds.
Mutual funds can invest in things that individuals might not be able to because of a minimum investment.
What are some benefits of pooling funds together for collective investments?
- economies of scale
- diversification
- access to professional investment management
- access to more asset classes, strategies & foreign markets
- regulatory oversight
- tax deferral
- liquidity
What is the key attribute of an Open-Ended Fund?
The fund can create new shares to meet investor demand and cancel shares when investors sell. At the same time, the managers are buying/selling the underlying stocks as investors buy/sell shares in the fund. Investors buy & sell shares at the NAV.
When might a mutual fund manager charge a client a redemption fee?
A redemption fee is charged when an investor sells their shares.
What is a front-end load?
It is the fee that clients pay to the broker when buying shares. Regulators cap the fee at 8.5%.
Back-end load is the fee that clients pay when selling.
What are the 3 classes of shares and their characteristics?
- Class A - charge front-end load, lower annual expenses
- Class B - no front-end load, just back-end load & annual expenses
- Class C - low front/back-end load, high annual expenses
What is the name for an investment fund that is established as a trust in which the trustee is the legal owner of the underlying assets and the unit-holders are the beneficial owners?
Unit trust.
- usually found in common law systems e.g. UK.
- open-ended investment fund
Who are the main parties of a unit trust?
- Unit trust manager - buys/sells assets
2. Trustee - holder of the assets for the unit holders
Do managers of a Unit Investment Trust actively trade assets?
What is the NAV?
NAV - net asset value = a funds assets - liabilities.
Provides a per-share value for a mutual fund.
Open-ended funds trade shares at the NAV, Closed-Ended funds do not.
What is a Closed-Ended Fund?
They are funds which have a fixed limit on the number of shares. When an investor buys/sells, they are doing so on the secondary market, with other investors. The share price could then be lower or higher than the NAV (Net Asset Value), providing new investors with a discount or premium
Berkshaw Hathaway is an example of a closed-end fund. People buy & sell their shares but the number of total shares stays the same.
How may a closed-ended fund decrease their premium? (If their shares were trading at a premium)
New shares can be issued to bring the price closer to the NAV. The investment company may also buy shares from their investors and cancel them or hold them in the treasury.
What are the 3 main cases of Chinese trust products?
- Real Estate Trust
- Infrastructure Construction Trust
- Commercial Enterprise Trust
What is an ETF?
ETF - Exchange-Traded Fund - a type of open-ended fund traded on the stock exchange. Market makers provide liquidity for ETFs. The funds holdings are transparent, allowing for the calculation of the NAV.
