Chapter 7 Flashcards
When investors decide to invest in a particular asset class such as equities there are two ways they can do it
Direct investment and indirect investment
It is when an individual personally buys shares in a company such as buying shares in apple the technology giant
Direct investment
It is when an individual buys a stake in an investment fund such as mutual fund that invest in the shares of a range of different types of companies perhaps including apple
Indirect investment
There is a range of funds available that pool the resources of a large number of investors to provide access to a range of investments. this pooled funds are known as
Collective investment schemes (CIS)
It is one that can create new shares in response to investor demand of cancel them when sold so that their capital can expand or contract
Open-ended fund
It has a fixed capital days so if an investor wants to buy shares they will do so on the stock exchange and buy them from another investor who wants to sell
Closed-ended fund
These are funds that are established in europe and marketed internationally are often labeled as
Undertakings for collective investment in transferable securities (UCITS) funds
It is seen as a measure of quality that makes them acceptable for sale in many countries in the middle east in asia
Ucits branding
It pull the resources of a large number of investors with the aim of pursuing a common investment objective
Investment funds
The pooling of funds brings a number of benefits including
Economies of scale
diversification
It refers to the fund managers approach to choosing investments and meeting the fonts objectives
Investment styles
It is seen in those types of investment funds that are often described as index tracker funds
Passive management
It involves constructing a portfolio and such a way that it will track or mimic the performance of a recognized index
Index tracking or indexation
It seeks to outperform a predetermined benchmark over a specified time period
Active management
It means that the manager focuses on economic in industry trends rather than the prospect of particular companies
Top-down
It means that the analysis of a company’s net assets, future profitability and cash flow and other company specific indicators is a priority
Bottom up
Range of investment styles
Growth investing
value investing
momentum investing
contrarian investing
Which is speaking the shares of companies with present opportunities to grow significantly in the long-term
Growth investing
Which is taking the shares of companies that are undervalued relative to their present and future profits or cash flows
Value investing
Which is speaking the shares whose share price is rising on the basis that this rise will continue
Momentum investing
The flipside of momentum investing which involves picking shares that are out of favor and may have hidden value
Contrarian investing
Index trackers and actively managed funds can be combined in what is known as
Core-satellite management
These are funds that combine elements of both traditional passive and active investing
Smart beta funds
Basic to outperform traditional passive strategies by targeting value-creating investment ideas such as finding bar games following a trend or seeking safety
smart beta funds
It is an investment fund that can issue and redeem shares at any time
Open-ended fund
the most well known type of US investment fund
mutual fund
most mutual fund shares are sold mainly through
brokers
banks
financial planners
insurance agents
The price that an investor will pay to buy shares or received when they are redeem is based on the
NAV of the underlying portfolio
Three main types of funds in european open-ended funds
SICAV
unit trusts
OEIC
It refers to a series of EU regulations that were originally designed to facilitate the promotion of funds to retail investors across europe
UCITS
Is one of the main centers for funds that are to be distributed to investors across european borders and globally
luxembourg
An investment company with variable capital or in other words and open-ended investment company
SICAV - a Societe d’Investissement a Capital Variable
Do not have a legal personality instead their structure is based on a contract between the scheme manager and the investors
FCP
Is an investment fund that is established as a trust in which the trustee is the legal owner of the underlying assets in the unit holders are the beneficial owners
unit trust
Unit trust are described as
dual priced
The price the investor receives if they are selling
bid price
The price the investor base is buying
offer price
The difference between the bid price and offer price is
bid offer spread
They are a form of icvc that is structured as a company with the investors holding shares
OEIC
Refers to the use of the mid market prices of the underlying assets to produce a single price at which investors buy and sell
single pricing
The capital of this is therefore fixed and does not expand or contract in the way that an open-ended funds capital does
closed ended funds
The basic types of investment companies in the us
mutual fund
closed ended funds
unit investment trusts
It is considered to be a security that cannot be sold within 7 days at the approximate price used by the font in determining nav
illiquid security
It does not actively trade it’s investment portfolio instead it buys are relatively fixed portfolio of securities
UIT
It is actually a company and not a trust, it will invest in a range of investments allowing its shareholders to diversify and lessen their risk
investment trust
Such investment trust are commonly referred to as
split capital investment trusts
These companies are allowed to borrow money on a long-term basis by taking out bank loans or issuing bonds
Investment trust
These are well established in countries such as the us uk australia canada and france
Real estate investment trusts
one of the main features of this is that they provide access to property returns without the previous disadvantage of double taxation
REITs
it gives investors access to professional property investment and might provide them with new opportunities such as the ability to invest in commercial property
REITs
the risk that the investment will not be able to be readily realized
liquidity risk
is an investment fund usually designed to track q particular index
exchange traded fund
a method of managing an investment portfolio that seeks to match the performance of a broad based market index
passive investment management
is the traditional form of index replication and is the one favoured by the largest and long established ETF providers
physical replication
three tracking methods of physical replication
full replication
stratified sampling
optimization
this method requires each constituent of the index being tracked to be held in accordance with its index weighting
full replication
this method requires a representative sample of securities from each sector of the index to be held
stratified sampling
this method costs less than fully replicating the index tracked, but is statistically more complex
optimization
involves the fund manager entering into a swap with a market counterparty to exchange the returns on the index for a payment
synthetic replication
are reputed to be high risk and sought to eliminate or reduce market risk
hedge funds
common aspects of hedge funds
structure
high investment entry levels
investment flexibility
gearing
liquidity
cost
is medium to long term finance provided in return for an equity stake in potentially high growth companies
private equity
it is invested in exchange for an stake in a company and as shareholders the investors returns are dependent on the growth and profitability of the business
private equity
raise their capital from a variety of sources but mainly from large investing institutions
private equity firms
are now usually structured in different ways from retail investment funds
private equity arrangements
