Chapter 9, 10, 11 Investment classes Flashcards
Money market: Reasons for liquid assets
POURS
Protection of monetary value/ Stable capital values to stabilise the solvency postion Opportunities Uncertain outgo Recent cashflow Short term commitments
Money Market: Economic reasons for holding cash
GRID
General economic uncertainty
Recession expected (Equity M performance, Interest rate changes, fiscal deficit)
Interest rates expected to rise (Real asset performance, bond market, nominal returns)
Depreciation of local currency
- hold cash abroad
- Raised interest rates to protect currency
Risks affecting bonds specifically:
CLAIM R
Credit Liquidity Actuarial (A-L Mismatch) Inflation Market Reinvestment
Problems with overseas investment:
MTV CATERPILLAR
Mismatching domestic liabilities Tax Volatility due to exchange rate Custodianship/ currency risk Administration Time delays Expense/ expertise Regulation poor Political problems Information lacking / infrastructure of country Language Liquidity Accounting differences Restrictions on share ownership
Emerging market considerations:
CAMPER C
Current market valuation
Added diversification
Marketability/ market regulation
Possibility of high future economic growth/ political stability
Economic growth - lower base, demographic advantage
Regulation and restriction on foreign investment
Currency stability
Prime/Specific property characteristics
CALL STUD
Comparables Age/condition Location Lease structure Size Tenant quality Usage of building Development Potential
Merits of indirect investments IN DELTA SEED CLEMT
Index tracking possible
No need to do own investments
Diversification Economies of scale Less costs of direct investments Tax and marketability advantages Access - wider range of investments Share Price (ITC only) -> Discounted NAV (bought cheap) Expected return higher than normal shares (extra volatility) Expertise of investment managers Divisibility of assets
Control lost Lack diversification away from equities (Property equity) Extra volatility Management costs Tax disadvantages
Reasons for foreign investment DIMI:
Diversification Increase expected returns: - higher risk markets - inefficient markets Match Liabilities in foreign currency Investing in a number of different countries or economies with a low degree of correlation helps reduce portfolio risk
Indirect overseas investment MHEDiCs:
Multinationals based in domestic markets
Holding companies with foreign holdings
Domestic companies with substantial Exports
Derivatives based on foreign underlying assets
CIS’s
Merits of Indirect vs direct, Foreign markets SNoPSA NED CorT
Specialist knowledge of foreign markets acquired
No need for research of foreign markets
Still local
Practically easy: Admin and accounting made easier
Access to markets you usually wont have
No control over the market exposed to
Extent of currency risk is uncertain- hedges, derivatives, swaps
Dilution of foreign exposure
Correlation with local market- market segment, political, etc.
Taxation problems - possible double tax
Differences between UT and ITC - BAG WiC MaTO:
Bid/offer spread higher for ITC Assets bought cheaper: ITC (Discounted NAV) Gearing ITC – higher Return and Volatility Wider asset range for ITC Change in NAV of ITC Marketability higher – UT Tax Open ended- UT, Closed ended - ITC
Merits of Indirect Property equity investment vs direct property investment
CoRECD MED
Merits of property equity over direct property investment:
DiSEL NoNo ProC
Correlation with equity market Risks of direct property investment avoided Expected return and volatility Control lost Diversification Marketability Expertise Divisibility
Diversification added over a large ray of properties
Smaller entry costs
Liquidity
No need to invest time in finding tenants and letting to them
No unique risks such as obsolescence and void periods
Expertise from investment managers gained
Property equity is correlated with equity market
Control lost
Merits of UT vs Direct investment
DEMSIN CATaLL
Merits of ITC vs Direct investment
DEMSIN AssGear CATE
Diversification Expertise by investment managers Marketability - sale guaranteed Specialist sector No need to carry out own INvestment Track specific INdexes
Cheaper ASSets - Discount to NAV
GEARing - higher expected returns
Control lost Additional charges - management fees Tax differences Limited gearing Limited amount of assets that can be invested in
Control lost
Additional charges - management fees
Tax differences
Extra volatility
Advantages of grouping equities into industries PFIEP
CMaRS
Practicality Factors affecting the company are similar Information from a common source Expertise only on one area Portfolio valuation is easy
Correlation due to similar:
Markets
Resources
Structure
Main driver behind share prices
Investors expectations of the future profitability of the company.
- Any news that might affect the future profitability will cause a proportional movement in the share price
