Investment Companies (13)

Question 1

INVESTMENT COMPANIES

Answer 1

financial intermediaries that collect funds from individual investors and invest them in a range of assets.

alternative to traditional banking

Question 2

MAIN TYPES OF INVESTMENT COMPANIES

Answer 2

1. OPEN-END FUNDS (mutual funds, obligation to redeem shares at NAV at any time, cont issuing of new shares)

• equity funds / stock funds
• bond funds
• hybrid funds
  (diversify across securities and issuers, investors prefer separate funds)
• money market funds
  (fewer fees, popular among small investors)

2. CLOSED-END FUNDS (issues a fixed number of shares, most aint redeemable at NAV, YES borrow money and pursue ≠ objectives)
3. EXCHANGE-TRADED FUNDS (ETFs)
   IC whose shares traded intraday at market-determined prices, diversifies portfolios + professional management

Question 3

any special cases? (types on investment companies)

Answer 3

• Unit Investment Trust (UIT) in US
  pools of money invested in a portfolio that’s fixed for the life of the fund. “Unmanaged”. US type. Stated termination date.
• UCITS in EU
  “Undertakings for Collective Investment in Transferable Securities”
  single European regulatory framework for an investment vehicles designed to enhance the single market while maintaining high levels of investor protection.
  (reduces costs as there’s no need to create a different investment vehicle for each country)

Question 4

ADVANTAGES OF COLLECTIVE INVESTMENTS

each IC has its own specific advantages

Answer 4

• diversification (risk reduction)
• profitability regardless of the investment made (no min Q)
• P and fees are lower due to larger volumes
• managers have greater knowledge and professionalism
• operational advantages (less bureaucracy, etc)

Question 5

ELEMENTS involved in all investments made through IC

Answer 5

INVESTOR - shareholder // unit holder
right to redeem shares, to information and to hold the MC accountable

MANAGEMENT COMPANY - one can manage several funds
limited company whose purpose is the management, representation and administration of the IC
- drawing up of the funds and its regulations
- keeping accounting up-to-date (NAV, new issues, authorise redeems…)
- inform investors

CUSTODIAN COMPANY ≠ MC (protection motives)
responsible for holding the assets in which the IC invests your wealth
- safeguarding investors interests
- completion of share subscriptions, making the MC approved redeems, satisfy dividends…

FUND DISTRIBUTION COMPANY
responsible for finding investors and dividing the fund between the in exchange for a fee (in Spain this fees is charged to the MC)

Question 6

management types

Answer 6

1. Quantitative Management (active)
   quantitative model - large database, recommendations as regards purchasing and sales
2. Indexed Management (passive)
   linked to a reference or benchmark index, replication of its behaviour (charges low fees)
3. Alternative Management (hedge funds)
   investment in every type of financial asset, high levels of leverage are often relied on by means of the use of derivative products
4. Guaranteed Products
   they guarantee the preservation of the K or a minimum amount of it. they include a structure of derivatives to limit the final profitability

Question 7

MUTUAL FUNDS

Answer 7

most important segment of this industry

• high liquid
• informative transparency
• high level of diversification: “general diversification rule”
  5-10-40 rule = no more than 10% of net assets in money markets, aggregate limitation of 40% of net assets on exposures of greater than 5% to simple issuers

Question 8

MUTUAL FUNDS FEES

Answer 8

1. Expense Ratios (IMPLICIT FEES) - taken from mutual funds assets (NAVPS)
2. Loads (EXPLICIT FEES) - directly payable by the investor
   (i) SUBSCRIPTION FEES (front-end loads, charged at the time of purchase) class A
   (ii) CONTINGENT DEFERRED SALES CHARGES (back-end loads, charged only when you sell the fund) class B
   (iii) LEVEL LOADS (charged continuously as an “ongoing level percentage”)

Question 9

ETFs ADVATAGES

Answer 9

• immediacy
• liquidity
• transparency (clear link to an Index)
• lower cost than an investment fund

Question 10

ETFs DISADVATAGES

Answer 10

• a securities account must be opened to buy one
• broker fee (in addition to MC and custodian fees)
• Active management could improve returns

Question 11

EVALUATION OF FUNDS

Answer 11

PROFITABILITY
measured from the net asset value

RISK

• Sharpe Ratio: not sufficiently diversfied, the higher the better
• Treynor Index: adequately diversified, beta risk = adequate measurement of risk

Question 12

DISADVANTAGES OF COLLECTIVE INVESTMENTS

Answer 12

• reduced profitability
• reduced flexibility
• do not completely eliminate the need for investment consultancy