Lecture 11 - Non Bank Finanial Instutions

Question 1

Depository institutions or monetary FI

Answer 1

More related to money supply, more subject to supervision and regulations; deposit holders are discretionary
E.g. Commercial banks, building societies, credit unions

Question 2

Non-depository financial institutions or investment institutions

Answer 2

E.g long term insurance companies, pensions funds, investment banks, mutual funds, finance companies

Question 3

Investment instructions types

Answer 3

Pension funds
Long term insurance companies
Investment trusts
Unit true, open-end investment companies, property trusts

Question 4

Non-bank financial institutions types

Answer 4

Mutual funds and other investment funds
Hedge funds
Pension funds

Question 5

Investment funds

Answer 5

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

Question 6

Mutual funds are a popular choice among investors

Answer 6

Professional management
Diversification
Affordability
Liquidity

Question 7

What types of securities MFs invest in?

Answer 7

Money market funds 
Bond 
Equity funds invest in corporate stocks/shares 
Growth funds
Income funds 
Index funds 
Sector funds 
Target date funds

Question 8

Benefits of mutual funds

Answer 8

Professional investment management 
Potential diversification 
3 ways to earn money: 
- capital gains distributions 
- increased NAV - net asset value 
- dividend payments

Question 9

Risks carried by mutual funds

Answer 9

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

Question 10

Open-ended fund

Answer 10

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.

Question 11

Closed-end funds

Answer 11

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

Question 12

Gearing effect

Answer 12

Debt plus equity

Total value of funds invested in ordinary share only
The value of investment trust asset portfolio

Question 13

How to buy and sell mutual funds

Answer 13

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

Question 14

SPIVA

Answer 14

Standard and Poor’s indices versus Active

Question 15

The new funds

Answer 15

By 2007 their assets increased threefold since 2000

Hedge funds
Private equity
Sovereign wealth funds
Money market funds

Question 16

Hedge funds

Answer 16

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

Question 17

Annual growth of 500 vs growth of top 20 in USD

Answer 17

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.

Question 18

Short selling

Answer 18

A way of profiting from share prices going down. A common strategy in hedge funds

Question 19

Equity hedge

Answer 19

Hedge fund strategy where investing costs of s core holding of long equities hedged at all times with short sales of stocks

Question 20

Fixed income Arbitrage

Answer 20

Pricing differentials between fixed income securities

Question 21

Merger Arbitrage

Answer 21

Simultaneously buys and sells the stocks of two merging companies

Question 22

Macro hedge

Answer 22

Investment technique used to mitigate or eliminate downside systematic risk from a portfolio of assets

Question 23

Pension funds

Answer 23

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)

Question 24

Uk state pension

Answer 24

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

Question 25

Pension crisis

Answer 25

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

Question 26

Defined benefit vs defined contribution

Answer 26

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.

Question 27

Active management

Answer 27

Fix winners

Question 28

Passive

Answer 28

Use indices for decisions