Chapter 7: Investment Funds Flashcards
What is the Asset management sector responsible for?
For investment management of institutional and retail funds which totalled £9.4 trillion.
How can the size of the asset management sector be seen?
Seen in regular reports issued by IA - the trade body for UK-based asset management industry.
What’s the role of IA?
Represent the industry, principally to the gov’t and regulators, as well as to press and public, and to promote high standards.
Before making any investments, what questions should investors ask themselves?
- What am I investing for?
- What amount of money will I need?
- Over what timescale do I want investment returns?
- What risks am I prepared to take?
- What types of assets are right for me?
- How can I avoid risk?
- What mix of investments is best suited to my objectives and attitude to risk.
- Do I need income now or later?
What are the two ways in which an investor can purchase an asset class?
Direct or indirect.
What is Direct Investment?
When an individual personally buys shares in a company, e.g. BP.
What is Indirect Investment?
When an individual buys a stake in an investment fund, e.g. mutual fund that invests in shares of a range of different types of companies.
What do Collective Investment Schemes (CISs) do?
Pool resources of a large number of investors, with the aim of pursuing a common investment objective.
What benefits do CISs bring?
- Economies of scale.
- Diversification.
- Access to professional investment management.
- Access to geographical markets, asset classes or investment strategies which might otherwise be inaccessible to the individual investor.
- Regulatory oversight.
- Tax deferral (some cases).
What’s a key benefit of diversification?
Risk is lessened when an investor holds a diversified portfolio (but opportunity of incredible outperformance is diversified away) helping to mitigate against impact incase of big collapse of a company, e.g. Lehman Brothers, Northern Rock.
What must an investor have before they can diversify a portfolio correctly?
Substantial amount of capital:
* £3k in 30 different companies = £100 each plus commission (not great).
* £3k into a fund with 80 companies and small commission = money goes further.
What’s the benefits of an Collective Investment?
- As investment is pooled with those of lots of other investors, commission, as a proportion of the fund, is very small.
- Fund might be invested on shares from many different sectors (industry diversification)
- Fund may invest in a variety of bonds, cash, equities and property allowing for diversification.
- Access to investing skills of a fund manager - they follow their chosen markets closely and carefully consider what to buy and whether to keep or sell their chosen investments.
What fees are associated with Collective Investments?
- Entry/Initial charges.
- Exit charges.
- Annual management fees.
What do the fees for Collective Investment cover?
- Fund manager’s salary’s.
- Technology.
- Research.
- Their dealing.
- Settlement and risk management systems.
- To provide a profit.
(no guarantee on performance of a fund or how it will perform in comparison to similar funds or benchmarks).
What is Active Management?
Seeks to outperform a predetermined benchmark over a specified time period. It does so by employing fundamental and technical analysis to assist in forecasting of future events, which may be economic or specific to a company, so as to determine the portfolio’s holdings and timing of purchases and sales.
Which fund has higher charges?
Actively managed funds have higher charges than passive funds.
What is meant by ‘top-down’ and ‘bottom-up’?
TD = manager focuses on economic and industry trends rather than prospects of particular companies.
BU = analysis of company’s net assets, future profitability and cash flow, and other company-specific indicators, is a priority.
What investment styles are included in bottom-up?
- Growth investing.
- Value investing.
- Momentum investing.
- Contrarian investing.
What’s meant by Growth Investing?
Picking shares of companies that present opportunities to grow significally in the long term.
What’s meant by Value Investing?
Picking shares of companies that are undervalued relative to their present and future profits or cash flows.
What’s meant by Momentum Investing
Picking shares whose share price is rising on the basis that it will rise and continue.
What’s meant by Contrarian Investing?
Flip side of momentum investing, involves picking shares that are out of favour and may have ‘hidden’ value.
What is Passive Management?
Seen in investment funds (often described as index tracker funds/Indexation). Involves constructing portfolio in such a way that it will track/mimic the performance of a recognised index.
What assumption does Indexation take?
That securities markets are efficiently price and therefore cannot be consistently outperformed. Consequently no attempt is made to forecast future events or outperform the broader market.
What is a benefit of employing indexation?
- Relatively dew active portfolio managers consistently outperform benchmark equity indices.
- Fund’s charges will typically be significantly lower than actively managed funds.
- Once set up, passive portfolios are generally less expensive to run than active portfolios, given a lower ratio of staff to funds managed and lower portfolio turnover.
What is a disadvantage of adopting indexation?
- Performance is affected by the need to manage cash flows, rebalance the portfolio to replicated changes in index-constituent weightings, and adjust the portfolio for stocks coming into, and falling out of, the index. This can lead to tracking error when the performance does not match that of the underlying index.
- Most indices reflect the effect of the value of dividends from constituent equities on the ex-dividend date.
- Indexed portfolios may not meet all of an investor’s objectives.
- Indexed portfolios follow the index down in bear markets.
What is Core-Satellite management?
Investment strategies that incorporate both active and passive investment styles.
What is one way of core-satellite managing?
By indexing, say, 70-80% of the portfolio’s value (the ‘core’), so as to minimise the risk of under performance, and then fine-tuning this by investing the remainder a number of specialist actively managed funds or individual securities. This is the ‘satellite’ element of the fund.
