Lecture 3- Introduction to funds management

Question 1

Who does the investment risk remain with?

Answer 1

The contributor

Question 2

What are the main groups of fund mangers?

Answer 2

Superannuation, life insurance and public unit trusts

Question 3

What are the main asset classes for investment?

Answer 3

• Equities and units
• Securities
• Cash and deposits
• Overseas assets
• Alternative investments

Question 4

What do fund manager do?

Answer 4

1) Collect and administer investors funds

2) Invest the pooled funds

Question 5

What is superannuation and what are the two types of schemes?

Answer 5

Long term savings scheme that aims to generate retirement income.

a) Accumulation schemes: lump sum depending on amount of contributions and the rate of earnings on investment
b) Defined benefit schemes: commit to pay a specific benefit to the retiree

Question 6

What are the three factors that determine the amount of retirement funds within an accumulation scheme?

Answer 6

1) Contribution amount
2) Compounding (re-investment) of returns
3) Rate of return earned

Question 7

What are the two types of superannuation assets and the two types of superannuation portfolios offered to investors?

Answer 7

1) Growth assets: High risk, High return= generally equities and property securities
2) Defensive assets= Low risk, Low return= generally cash, bonds and bank deposits (rarely experience negative returns)
Two types of investment strategies are:
‘Balanced portfolio’= mix of growth and defensive
‘Growth portfolio’= includes mostly growth assets and a small amount of defensive assets

Question 8

What are the main types of superannuation provides?

Answer 8

1) Non for profit: Employers (corporate, public service schemes), trade unions (industry schemes)
2) For profit: Retail schemes (professional fund managers)
3) Self managed super funds

Question 9

What types of schemes are managed super? What does this means for investment managers?

Answer 9

Trusts.
Trustee- ensures investment manager allocates funds according to each contributors choice and in a manner consisted with the trust deed
Trustees have a fiduciary duty of care to scheme members
Licensed and supervised by Australian Prudential Regulation Authority

Question 10

What are self managed super funds?
What rules do they operate under?
What types of assets do they mostly invest in ?

Answer 10

• Assets in the fund are managed by the contributor
• Rules that are enforced by the ATO
• Invest less in equities and more in bank accounts

Question 11

What are public unit trusts?

Who is responsible for regulating them?

Answer 11

• Collective investment schemes that raise funds by selling units to the public, which represent a share of their assets.
• Regulated by ASIC

Question 12

What are the benefits of public trusts?

Answer 12

Provide access to wholesale financial markets, the expertise of professional portfolio managers

Question 13

How do public trusts provide liquidity?

Answer 13

• Buying units from and selling units to investors at their bid and offer prices- which they earn a spread (listed equity investments)
• Through the listing of units on the ASX (property)

Question 14

What are the two types of traditional public trusts and two types of alternative investment tursts?

Answer 14

1) Traditional: Property, Equity

2) Alternative: Hedge, Private Equity

Question 15

What are public property trusts?
Are they listed?
How many units do they have? Closed/ open ended
How is money earned for investors?
What are they leveraged by? What does this create for investors?

Answer 15

Public property trusts are established by financial institutors or property developers to acquire large properties (shopping centres)

• Generally listed
• ‘Closed ended’- have a set number of units
• Unit holders receive property revenue less fees
• Trusts use debt funds- exposes investors to i interest rate and funding risk

Question 16

What are equity trusts?
Are they listed?
What is their usual structure?
What do they invest in?

Answer 16

• Invest in shares listed on major exchanges
• Have a variety of specialised investments or objectives
• Generally open ended
• Are usually unlisted

Question 17

What are hedge funds?

Answer 17

• Pooled investment schemes that use complex investment strategies and very high levels of debt
• Charge ongoing management fees and performance- linked fees
• Mostly US based where managers are aggressive- seeking high returns and taking large risks

Question 18

What are the strategies used by hedge funds?

Answer 18

Long short strategy:

• Long position: Holding assets that establish a future buying price with the aim of making a profit from rising values
• Short position: would become profitable f assets fell in value enabling the manager to sell high and buy low

Question 19

Who regulates hedge funds in Australia?

Who seeks to reduce investor risk?

Answer 19

They are ASIC regulated

Funds of hedge funds seek to reduce investor risk

Question 20

What do private equity funds do?
Who are they formed by?
What do they lack?

Answer 20

Buy companies for the purpose of improving their financial position and then reselling them at a profit

• Formed by private equity firms that act as the fund’s controlling partner with equity funds raised from wealthy individuals and institutional investors
• Large levels of debt
• Lack liquidity

Question 21

What are the four benefits of collective investment?

Answer 21

1) Access to wholesale investments
2) Diversified investments that lower risk
3) Economies of scale that lower transaction costs
4) Investment expertise

Question 22

What are the two approaches to investment management and how do they relate to the EMH?

Answer 22

Active- not consistent with EMH- aim to beat the market

Passive- Consistent with EMH- form index funds that aim to replicable the return on a benchmark index

Question 23

How do active investment managers beat the market?

Answer 23

Through asset selection and timing of trades to identify over and under valued assets

Question 24

What are the two strategies used within the active strategy?

Answer 24

1) Technical analysis: using past prices and charts to predict future price movements
2) Fundamental analysis: attempt to calculate an assets value as the present value of its future payments

Question 25

What does technical analysis depend on?

Answer 25

Identification of price channels, price support, resistance lines and momentum indicators

Question 26

How will investors profit from fundamental analysis?

Answer 26

Determine the PV of future payments- enable them to determine the current value- if over valued- sell, if under valued- buy

Question 27

What are the two sentiment based strategies?

How will this impact their buy/sell behaviours

Answer 27

Momentum: investors believe prices take tim e to move to their new FV following the release of new information: Buy when price begins to rise
Contrarian: Investors believe markets overreact to good and bad new: Buy when prices fall (believe prices have fallen too much) and sell when prices rise (assuming they have risen too much)

Question 28

What does passive investment involve?

Answer 28

Managers form an index fund that replicates the returns achieved by a benchmark index

Question 29

What types of investments will passive investors invest in?

Answer 29

Invest in assets in proportion to their role in that index- or to lower costs- hold fewer shares and accept a small tracking error

Question 30

What is the management expense ratio of active compared to passive funds?

Answer 30

Passive is generally half that of active funds

Question 31

How is investment management performance evaluated?

Answer 31

The returns achieved given the risks taken

Question 32

How are investment managers rated?

Answer 32

Basis of their number risk and return history and a qualitative assessment of the managers ability

Question 33

Who are the two main rating agencies and how do the star ratings work?

Answer 33

S&P and Morning star: 3 indicates an expectation of average returns