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Financial Markets 2 > L7 - Investment Companies > Flashcards

L7 - Investment Companies Flashcards

1
Q

IC

A 
financial intermediaries 
collects funds from idv. investors and invests funds in potential range of assets
pooling of assets - to diversify PF
types:
- open end funds = MF
- closed-end funds
- EFs
- Unit Investment Trust UIT
- Undertaking for collective investments in transferable securities (UCITS)
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2
Q
  1. Mutual Fund

definition

A

IC buys pf of securities selected by PROFESIONAL investment adviser
to met specified financial goals
open end:
- obligated to buy back (redeem) shares of an investor at any me at current NAV
- cont. offering new fund shares to the public (share of MF actually participation of fund, diff. than share of company)

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3
Q
  1. Mutual fund

types

A

EQUITY fund
= invest in stock - publicly traded company

BOND FUND
= invest in bonds (gov, municipal, alternative returns depending on credit quality)

hYBRID FUND
= combination of stock + bonds into 1 fund
mix of risk - diversification - across diff. types of securities and issues of part. type of securities

Money MARKET MUTUAL FUND
= invest only in MM securities
funds yield depend entirely on performance of securities purchased

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4
Q
  1. Closed END FUNDS
A

IC issues a fixeed nr. g shared traded on stock exchange or OTC
specific type of hedge fund (buy non official assets?)

IC don´t redeem or issue shares continuously - only convert into money in spc. windows

externally managed - like MF

market price of CEF shares fluctuates and determined by S/D of marketplace

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5
Q
  1. ETF
A

IC whose sole purpose is replicate index
IC whose shares ar traded inraday on stock exchanges at real market prices
trade on shares of ETF same as normal stocks

Diversification, professional management,
but ETFs shares traded in retail market like any other securities (diff. from MF)
investors buy/sell TF shares via brokers just like any there stock

mimick index - hence buy and sell shares accordingly to match index.

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6
Q
  1. Unit Investment Trust in US
A

pools of money invested in PF
fixed for the life of the fund
IC buys &holds a generally fixed PF of stocks, bonds, securities
most UT hold fixed-income securities &expire at their maturity

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7
Q
  1. UCITS in EU
A

undertakings for collective investments in transferable securities
standard MF in EU but possible to market UCTIS across the EU without worrying in which country it is domiciled

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8
Q

ICI factbook

total net assets of wordwide regulated open-end funds

A

per instrument:

  1. equity -45%
  2. bond -21%
  3. mixed/other hybrid - 21%
  4. MM - 13%

per countries:

  1. US - 45%
  2. EU - 34%
  3. Asia - 13%

per household:
us household hold more than of their wealth in regulated funds (MTF, ETF) vs bank deposits and currency
US: 22-12

EU:8-30
regulated funds = ncl. invested fund shares

Japan: 4-53

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9
Q

US

investment companies total net asset by type and nr of investment companies by type

A

mutual by far the greatest
closed-end –> ETFS –> UTISS

when no new shares within fund redeemed - TV of fund can still go up:

a) value moves depending on MV of this assets (price) (bond/share price)
b) demand: more people willing to invest/buying MF whence money invested foes up (even when return constant)

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10
Q

EU

A

open end = invested funds 12.5

discretionary mandate = closed end 140% of GdP of EU union

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11
Q

Advantages

MF vs individual investment

A

diversification
- creation of sufficient large PF to achieve adequate diversification of risk (intrinsic diversifiable risk reduction)

execution of large operations = price fees obtained are smaller than small/medium size

managers have greater professional knowledge than individual ones (should be smarter)

inst. investment enables profitability with very small amounts, vs other assets than requires higher minimum investment
- invest in MF = invest in many shares but money to invest in smaller than doing it on your own (pool of many funds of diff. inv together)

existence of series of operational adv:
coupons, interest, dividends
(they are in charge, fixed b MF)

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12
Q

Drawbacks

MF vs individual investment

A

payment of management fee (reduced profitability of product)
Net asset value of fund (MV - fee)

reduce FLEXIBILITY

  • entry and exit must be at NAV (no intraday trading possible
  • end of day
  • some products even have only weekly or monthly liquidity

they don´t ELIMINATE the need for INVESTMENT CONSULTANCY

  • it is still necessary to choose between diff funds
  • carrying out range of investments policies
  • and still fund with same investment terms might behave differently
    (e. g. look for MF which adequate to risk portfolio, or what you are specifically looking at)

US: still only represents 27% of all investment in the market (regulated OE funds)

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13
Q

Participants

fund management companies

A

management companies
= limited companies with social purpose of which is the management represent &admin. of the MF
functions:
- elaborate regulations on how fund manage
- include the investment policies, which lays down the amount and portions in which fund will make investment
- cannot invest in everything - limited
- calculation of NAV on daily basis and issue and redemption of shares - UPDATE
- keeping accounting uptodate and informing participants os the state of assets

policies reflect aim of fund (reflected in the management policies managers should follow)
check investment policies: e.g. it says only invest in large cap, then it has to stick to it, cannot be changed
- limited investment possibilities
- increases risk?

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14
Q

fund management companies

Example

A

functions:

  • choice of securities reflected in accordance with
  • guidelines laid down in management regulations,
  • ordering the custodian institution to purchase
  • and sell the shares

can manage several funds

Information about:

  • where to invest
  • fees: fund spec feeds, redemption feeds
  • portfolio composition
  • product summary
  • price &performance: pf growth vs benchmark (10 larges holding only, but these can change, but not % of holding or sector tying to replicate)
  • pf and management fees
  • expenses: growth/income (average exp. ratio of similar funds)
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15
Q

Participants

A

investors/shareholder/unit holder

  • individual or legal entity making contributions to investment fund
  • UH have the right to obtain regular info. on PF of fund and value of shares

Fund Distribtuion Company:

  • responsible for finding ivnestors
  • dividing fund between them in exchange for a fee

Custodian Company:

  • responsible for holding assets in which fund invests your wealth
  • safeguarding interests of uniholder
  • completion of shares subscription
  • redistributing dividends of securities and profits from shares in circulation
  • making securities purchase and sales operations
  • collection of interest o dividends of asset in fund PF
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16
Q

Management Style

A

A) ACTIVE:

  • quantitative management
  • manager, model or robot which decides composition of stock within PF (Delegation)
  • greatest risk but high fees
  • decision concerning composition of stocks are delegate to quantitative model or person

B) PASSIVe:

  • indexed; ETFS
  • index simulation but fixed composition (buy&hold strategy)
  • funds linked to reference or benchmark index
  • charge lower fees

ALTERNATIVE M:
- hedge funds
invest in every type of financial asset (fixed, variable yeld, currencies)
- implement part-. strategies to cover o highlight risk
- generate huge risk/return profitability

GUARANTEED PROD:

  • guarantee preservation of capital or min. amount of it
  • inst. distributing fund usually one for payment in event that NAV doesn´t reach the guaranteed profitability
  • buy “exotic” option but only receive premium if fund outperforms
17
Q

Mutual funds

A

specific advantages:

  • high liquidity
  • highly flexible (only min. investment), fractions of shares can be subscribed or repaid completely freely
  • informative transparency (NAV, wealth. n of participants; regulations. financial data etc.)

highly level of diversification
5/10/40 rule:
no more than 10% invested in a company only
- investment between 5-10% the exposure should be less than 40% - net asset on exposre
- otherwise invest in t-bills

exception:
- fixed instruments issued or guaranteed by public body of EU up to 35% can be invested
- 100% can be reached for single issuer, providing it is diversified in at leas 6 issues (none>30%)
- up to 25% can be invested in fixed issued by credit and guaranteed by asset (mortgage backed eg)
- indexed or passively management funds (replicating behaviour of index) have separate limits to help ens they meet the objectives
(could avoid this rules, as free of management interest (fixed))

18
Q

Mutal Fund Fees

A

expressed as % of assets managed by funds
fees divided into:
a) expenses
mutual fund expense ratio:
- fees paid to MF firm to manage &operate fund (incl. admin expenses)
- not directly payable by investors but reflected in mutual fund assets (NAV per share)

b) MF load:
= fees charged t investor when buying/selling certain types of MF
- purpose is pay a broker or advisor for their services
- front-end load - purchase subscription fees (identified as share class A)
- back.end loads - charged only when you sell the fund
- level load - ongoing (1%) that investor pays to MF (MF with level loads = SHare CLass C funds, charged as expense ratio)

19
Q

Spain Statistics

A 
1. type 
2-. expensee ration
- equiy, hybrid
- bonds, index
- passive, MM
  1. expense ratio result:
    - hybrid has actually highest follow by equity and bonds
    - e.g. 0.62% = extra gan receive f PF dops (from initial vale), expense results in 0%
    - passive, MM, index have very low

4.- front and back load
- MM neither
- index no front
-
5. deposit fee increases with exp. fee

20
Q

ETFs

A

passive management
funds that trade on stock exchanges
prices linked to evolution of an index, day by day and min by min
- behave like a share of a company

advantages:

  • immediacy
  • liquidity
  • transparency
  • lower cost than investment fund - management o%

Drawback:

  • securities account must be opened to buy one - involves expenses
  • management, custodian fee, all broker fee (buying/selling shares) required to purchase the ETf
  • sometimes bettered by actively MF, although in LT they have shown be more consistent

Evolution:

  • increased
  • investors know exactly what they are buying (index)
  • fees and cost ridiculous compared to MTF
  • technology doesn´t play bg role here
21
Q

Fund Performance

A

main way in which investor can evaluate a find
compare return &risk with benchmark
Rft = NAVPS ft - NAVPS ft-1 (Diff) + Div ft / NAVPS ft-1

when calculating profit - add fee
NAVPS = MV - fee/ nr shares

risk
a) diversified - beta risk (CAPM)
trainor index
tIf = Rf - R / betaf

b) not diversified risk - risk (SD - volatility)
sharp index = Rf - R / sigmaf
higher SI is a better MF

how much money expected to receive assuming risk relevant for comparing funds

exog = market risk premium
endog =  return of MF
22
Q

Investment performance

A

each MF has specified investment policy -described in funds prospectus

  • this classes of asss hat MF holds depends on investment policies
  • are they obtaining extra gain ? - performance de to extra risk investment
  • positive alpha
  • Rft vs R

Financial Markets 2 (9 decks)

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