Lecture 11 - Non Bank Finanial Instutions Flashcards
Depository institutions or monetary FI
More related to money supply, more subject to supervision and regulations; deposit holders are discretionary
E.g. Commercial banks, building societies, credit unions
Non-depository financial institutions or investment institutions
E.g long term insurance companies, pensions funds, investment banks, mutual funds, finance companies
Investment instructions types
Pension funds
Long term insurance companies
Investment trusts
Unit true, open-end investment companies, property trusts
Non-bank financial institutions types
Mutual funds and other investment funds
Hedge funds
Pension funds
Investment funds
Mutual funds are collective investments run by investment managers giving the small shareholder a spread of risk
They allow individuals to invest on a more efficient basis than they could achieve themselves
Small individual savings are aggregated into larder investment funds
Investments in money market instruments, equities or bonds
Investors pay a fee for investment fund service
Mutual funds are a popular choice among investors
Professional management
Diversification
Affordability
Liquidity
What types of securities MFs invest in?
Money market funds Bond Equity funds invest in corporate stocks/shares Growth funds Income funds Index funds Sector funds Target date funds
Benefits of mutual funds
Professional investment management Potential diversification 3 ways to earn money: - capital gains distributions - increased NAV - net asset value - dividend payments
Risks carried by mutual funds
Past performance does not predict future returns but tells about how volatile or stable the fund has been over a period of time. More volatile implies high risk
Investors may lose some or all of the money
Dividends or interest payments might change
Open-ended fund
Ex unit trusts in the UK
Raises money and spends it on a wide range of shares
It’s a diversified portfolio of pooled investor money that can issue an unlimited number of shares. The fund sponsor sells shares directly to investors and redeems them as well. These shares are priced daily, based on their net asset value.
Closed-end funds
Launch through an initial IPO and sell on the open market. It’s a shareholding company that raises money and then invests it in a portfolio of equities
Gearing effect
Debt plus equity
Total value of funds invested in ordinary share only
The value of investment trust asset portfolio
How to buy and sell mutual funds
Investors buy mutual fund shared from the fund itself or through a broker for the fund, rather than from other investors
Price that investors pay for the mutual fund is the fund’s per share net asset value plus any fees charged at the tim pet of purchase
Mutual funds shares are redeemable - investors can sell their shares back to the fund at any time
The prospectus contains information about the mutual funds investments, risks and performance and expenses. Read it carefully before buying shares in a mutual fund
SPIVA
Standard and Poor’s indices versus Active
The new funds
By 2007 their assets increased threefold since 2000
Hedge funds
Private equity
Sovereign wealth funds
Money market funds
Hedge funds
Are increment funds that attempt to generate positive investment returns based on the skill of their manager rather than general market returns
Strategies =
Equity hedge
Global macro
Relative value Arbitrage
Convertible Arbitrage
Most funds are located off shore in countries where financial regulation is relatively light
Charges = management fee and performance fee
Annual growth of 500 vs growth of top 20 in USD
Over last ten years the growth in assets managed by the argent 20 firms has generally exceeded the growth rate of the broader group of 500 firms.
Short selling
A way of profiting from share prices going down. A common strategy in hedge funds
Equity hedge
Hedge fund strategy where investing costs of s core holding of long equities hedged at all times with short sales of stocks
Fixed income Arbitrage
Pricing differentials between fixed income securities
Merger Arbitrage
Simultaneously buys and sells the stocks of two merging companies
Macro hedge
Investment technique used to mitigate or eliminate downside systematic risk from a portfolio of assets
Pension funds
Provides retirement income
Pooled monetary contributions from pensions plans set up by employers unions or other organisations to provide for their employees or members retirement benefits.
They can be funded or unfounded (Pay-as-you-go scheme)
Uk state pension
Pay as you go system
State pensions Age currently 66
Raise state pension age 1 year every 10
Flat rate pensions
Based on national insurance contributions
Requires 30 years NI contributions for a full pension
Need at least 10 qualifying years on your NI record to get any state pension
Pension crisis
UK state pension has been declining as a % of average earnings
People are living longer
Defined benefit schemes were invested in equities
Most schemes have deficits
New accounting standards (FRS17/IAS19) put these deficits on the balance sheet of the company
Many individuals with defined contribution schemes struggle to know how much to save and how to invest their funds
Defined benefit vs defined contribution
Defined benefits - employers guarantee a specific retirement benefit amount for each participating of a defend benefit plan, which can be based on the employees salary, years of service or a number of other factors. Employer bears the investment risk.
Defined contribution - plans are funded primarily by the employee, called the participant which the employer matching contributions to a certain amount. Contributions can be invested at the participants direction in select mutual funds or stock offered by the plan. The employer of longer has any obligation on the accounts performance after the funds are deposited, these plans require little work and are low risk to the employer.
Active management
Fix winners
Passive
Use indices for decisions
