chapter 6- institutional investors Flashcards
what are the 2 different types of insurance?
casualty (accident)
life (savings product)
what are the 2 types of pension scheme?
defined benefit
defined contribution
what are the 3 trusts that funds can be?
unit trusts- aka mutual funds
investment trusts- aka investment companies
open-ended investment companies- aka OEIC’s
what do institutional investors invest in?
asset classes- these include shares, bonds and real estate
what is asset collection?
the proportions that institutional investors invest in shares bonds and real estate
how are investment managers judged?
by quarterly performance
aim to be upper quartile
what is active management?
the use of investment managers to select investments
what is a cheaper alternative to active management?
index- tracking
what is an example of an index tracker?
exchange traded funds (ETF’s)
they can be actively traded
what does a sovereign’s wealth fund do?
invests its country’s wealth, often gained from natural resource exploitation
they are state controlled investment funds that channel a country’s surplus income- from natural resource sushi as oil and gas
what are the 3 types of institutional investors?
insurance companies
pension funds
investment management companies
collectively known as buy side as they buy securities from the sell side (issuers and intermediaries)
what are composites?
insurance companies that provide both life and casualty insurance
what does casualty insurance cover?
cover against financial loss and loss of possessions
e.g. household insurance, holiday insurance
what does life insurance cover?
insurance against death
this is to build up money so that when you die, your dependants have something to live off
what are SIFI’s?
- systematically important financial institutions
- after the 2008 global financial crisis, insurance companies and fund managers were targeted because of the vast amounts of money they have at their disposal to invest
what was the biggest insurer to go bust in the 2008 financial crisis and why?
AIG
it had a financial products unit that was writing credit default swaps (a type of derivative) on the risk of corporate borrowers defaulting
the crisis triggered a flood of credit default claims taking AIG down
what type of scheme was/ is a pension scheme?
a defined benefits- you know from the outset what the benefit is
however this has changed as they have become too expensive to sustain
what type of change has occurred regarding pensions?
- they have switched to defined contribution instead of defined benefits
- you know how much you pay however what it gives you when you recite is now unknown
what can a sponsor do when a pension is fully funded?
- can take a contributions holiday where it suspends any contributions to the fund itself
- as a result, someone may seek more than one sponsor
who are actuaries and what are they used for?
- they are statisticians who can work out the incidence of fatality from lifestyle profiles of a group of people big enough to be an effective sample
- used for pension funds
- this is how pension funds figure out their future liabilities (how many pensioners will live until what age)
what do fund managers do?
they manage retail money for people who are individual clients and wholesale money for pension funds
on what basis may a rich person have a fund manager?
discretionary- what and when to buy or sell
advisory- manager advises the client who takes the ultimate decision
what is the most common type of fund structure?
unit trust
what is an investment trust/ company?
- a public listed company
- they invest in shares of several hundred other public companies
- investors buy shares in it through the stock exchange, not through a fund manager
why are investment trusts close- ended?
because the fund manager cannot issue additional shares at will so there is always a finite number in issue
why are investment trusts good vehicles for income investors?
as companies, they don’t have to pay all of their income and can use reserves to smooth out dividend payments from year to year
this has allowed some investment trusts to achieve an unbroken and rising annual dividend for decades
what is a DCM?
- discount control mechanism
- allows them to buy their own shares when they fall to a discount and issue fresh shares when they are at premium
- in this way, the share price is brought closer in line with net asset value
what is a specialist type of investment trust?
- REIT- real estate investment trust
- established in the US in 1960
- public listed companies that specialise in buying and holding commercial property
what are the 3 types of net asset value?
DCM- discount control mechanism
REIT- real estate investment trust
OEIC- open ended investment company - bit of both DCM and REIT
what will major institutional investors do with asset classes?
they will invest in all different asset classes globally to maximise investment return and minimise risk - aka, diversifying of portfolio
how will asset allocation be driven?
- where you are based and what currency you are exposed to
- your liabilities and how long/short-term they are will determine asset allocation mix
- the more short term, the more your investments need to be liquid
what are the different types of equity fund?
- growth- these funds specialise in identifying capital growth over the medium- long term
- income- these funds invest in shares with strong dividend flows and in bonds- favoured by investors who need regular income
- small-cap/ medium-cap- these focus on smaller listed companies where growth may be greater but at higher risk of going bust
- VCT’S- venture capital- invest in unlisted start-ups and young businesses- high risk
- index- simply track an index by sampling or holding every share or through derivatives
- sector-specific- restrict themselves to a sector such as tech- for investors who want exposure to a specific industry
- region-specific- markets outside the UK
- international- invest outside the home country in whichever markets seem attractive at the time
what is a fund-of-funds?
a fund that invests in other funds
a disadvantage is the double level of fees
one set to the manager and other to the one who invests
what does it mean when market professionals are said to discount the future?
reflect in today’s price expectations of what is likely to happen in the future
what do momentum investors do?
they try and spot market moves that reflect underlying sentiment then jump aboard the market bandwagon and jump off it again before it collapses
what is churn when discussing investment performance?
where a manager starts to buy and sell frantically in the hope of finding the right combination of investments to lift his or her performance
It is expensive to churn a profile
what is shareholder activism?
the constant complaint that shareholders don’t hold managements to account
hedge funds can take it to extremes, pressuring companies they invest in to sell assets to realise value
what is passive investment?
programming a computer to do stock selection for you
what are ETFs?
passive funds that track index but are traded on a stock exchange
experience price changes on a minute- by- minute basis throughout the trading day
they allow immediate exposure to a market without stock picking
how do hedge fund managers expect to be paid?
2 and 20
2% of assets under management
20% on any increase in value
what are the 3 I’s?
issuers
intermediaries
investors
