Reading 51: Portfolio Management: An Overview Flashcards
Define exchange-traded funds (ETFs).
They issue shares in a portfolio of securities and are designed to track the performance of a specified index. An ETF purchases a large number of shares in the same proportion as the index it tracks, and issues shares in the ETF to investors who want to track the same index.
Explain the potential problems with the structure of open-ended funds.
The portfolio manager needs to manage cash inflows and outflows.
An inflow of new investment requires the manager to find new investments.
Funds need to keep cash for redemptions.
How do ETFs differ from mutual funds?
Investors in index mutual funds purchase shares directly from the fund, while investors in an ETF purchase shares from other investors.
ETFs have lower costs, but investors do incur brokerage costs when trading ETFs.
ETFs are constantly traded throughout the business day.
ETFs pay out dividends, while index mutual funds usually reinvest dividends.
The minimum required investment is usually smaller for an ETF.
ETFs are generally considered to have a tax advantage over index mutual funds.
Name the steps in the portfolio management process, and identify the steps in each.
Planning:
Understanding the client’s needs.
Preparing the investment policy statement (IPS).
Execution:
Determining the asset allocation.
Analyzing securities and constructing the portfolio.
Feedback:
Monitoring and rebalancing the portfolio.
Measuring and reporting performance.
Describe sovereign wealth funds (SWF).
They are government-owned investment funds. SWFs are usually established to invest revenues from finite revenue sources to benefit future generations of citizens or to manage a country’s foreign exchange reserves.
Define pooled investments and explain which funds are included in them.
Investments in securities issued by entities that represent ownership in the underlying assets held by those entities.
Funds included in pooled investments are mutual funds and exchange-traded funds, in which investors can participate with a relatively small initial investment. In addition, hedge funds and private equity funds, which may require a minimum investment of U.S. $1 million or more.
Describe the 2 types of mutual funds.
Open-end funds accept new investment funds and issue new shares at a value equal to the fund’s net asset value per share at the time of investment.
Closed-end funds accept no new investment money into the fund. Shares in the fund are traded in the secondary market, so new investors invest in the fund by purchasing shares in the market, and investors liquidate their holdings by selling the shares in the market.
Describe a separately managed account (SMA).
It is a fund management service for wealthy investors. The portfolio manager manages the account exclusively for the benefit of the client and aims to meet the needs of the client in relation to investment objectives, risk tolerance, and tax situation.
Explain endowments and foundations.
A university endowment is established to provide financial support to the university and its students. A charitable foundation invests the donations that it receives in order to fund grants that are in line with its objectives.
Typically, endowments and foundations aim to maintain the inflation-adjusted capital value of their funds, while generating the necessary income to meet their objectives. They are generally established with the intent of having a perpetual useful life and must balance short-term spending needs with long-term capital preservation requirements.
