Lecture 3- Introduction to funds management Flashcards
Who does the investment risk remain with?
The contributor
What are the main groups of fund mangers?
Superannuation, life insurance and public unit trusts
What are the main asset classes for investment?
- Equities and units
- Securities
- Cash and deposits
- Overseas assets
- Alternative investments
What do fund manager do?
1) Collect and administer investors funds
2) Invest the pooled funds
What is superannuation and what are the two types of schemes?
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
What are the three factors that determine the amount of retirement funds within an accumulation scheme?
1) Contribution amount
2) Compounding (re-investment) of returns
3) Rate of return earned
What are the two types of superannuation assets and the two types of superannuation portfolios offered to investors?
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
What are the main types of superannuation provides?
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
What types of schemes are managed super? What does this means for investment managers?
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
What are self managed super funds?
What rules do they operate under?
What types of assets do they mostly invest in ?
- 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
What are public unit trusts?
Who is responsible for regulating them?
- Collective investment schemes that raise funds by selling units to the public, which represent a share of their assets.
- Regulated by ASIC
What are the benefits of public trusts?
Provide access to wholesale financial markets, the expertise of professional portfolio managers
How do public trusts provide liquidity?
- 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)
What are the two types of traditional public trusts and two types of alternative investment tursts?
1) Traditional: Property, Equity
2) Alternative: Hedge, Private Equity
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?
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
What are equity trusts?
Are they listed?
What is their usual structure?
What do they invest in?
- Invest in shares listed on major exchanges
- Have a variety of specialised investments or objectives
- Generally open ended
- Are usually unlisted
What are hedge funds?
- 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
What are the strategies used by hedge funds?
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
Who regulates hedge funds in Australia?
Who seeks to reduce investor risk?
They are ASIC regulated
Funds of hedge funds seek to reduce investor risk
What do private equity funds do?
Who are they formed by?
What do they lack?
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
What are the four benefits of collective investment?
1) Access to wholesale investments
2) Diversified investments that lower risk
3) Economies of scale that lower transaction costs
4) Investment expertise
What are the two approaches to investment management and how do they relate to the EMH?
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
How do active investment managers beat the market?
Through asset selection and timing of trades to identify over and under valued assets
What are the two strategies used within the active strategy?
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
What does technical analysis depend on?
Identification of price channels, price support, resistance lines and momentum indicators
How will investors profit from fundamental analysis?
Determine the PV of future payments- enable them to determine the current value- if over valued- sell, if under valued- buy
What are the two sentiment based strategies?
How will this impact their buy/sell behaviours
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)
What does passive investment involve?
Managers form an index fund that replicates the returns achieved by a benchmark index
What types of investments will passive investors invest in?
Invest in assets in proportion to their role in that index- or to lower costs- hold fewer shares and accept a small tracking error
What is the management expense ratio of active compared to passive funds?
Passive is generally half that of active funds
How is investment management performance evaluated?
The returns achieved given the risks taken
How are investment managers rated?
Basis of their number risk and return history and a qualitative assessment of the managers ability
Who are the two main rating agencies and how do the star ratings work?
S&P and Morning star: 3 indicates an expectation of average returns
