week 3: investment funds Flashcards
What are Client Facing Funds?
That take money from savers (households, governments) with the aim of investing on their behalf in order to provide future returns over the long term
What are the differing types of Private Equity Funds?
buyout funds and venture capital funds
What is the main regulation that Mutual Funds must follow in the EU?
UCITS” directive
To ensure investor safety
What does UCITS stand for?
(Undertakings for Collective Investments in Transferable Securities)
Used in Europe for funds
What are some key features of funds in general? (PART 1)
a) All investors in funds hold a ‘share’ in the fund (typically a small percentage, in the case of retail investors a small fraction of a percent).
b) The assets in most funds are ‘marked to market’ (usually on a daily basis)
Can get NAV(Net Asset Value) after the deduction of liabilities (including the market value of derivatives used for hedging)
(exception is for some illiquid fund)
The value of the investor’s individual holding is their share in the fund × the total portfolio value.
c) Fund Owners implement % management fee for running the fund, based on the market value.
(fee is lower for institutional investors than for retail investors)
(This fee is also lower for
so called ‘passive funds’ than for ‘active funds’)
What are some key features of funds in general? (PART 2)
d) Some funds allow investors to withdraw (with short notice period).
Assets of the fund are sold at their current ‘mark to market’ value to repay the investor the value of their share.
-There is a transaction charge for selling. can be seen in US ‘open-end funds’ and UK ‘unit trusts’.
e) Other funds do not allow investors to withdraw.
E.G.
exchange traded funds and closed-end funds.
ETFs are quoted as securities on stock exchanges.
So can sell their share in the ETF to other new investors. E.G.
UK investment trusts and for US ‘closed-end funds’ (sometimes called closed end mutual funds).
f) Funds must of course attract investors at launch.
May continue to allow new investors to join the fund after their launch, but they may ‘close’ the fund to new investment.
Many costs:
upfront charges for investors (and a variety of charging mechanisms,
e.g. higher upfront charges may be accompanied by lower management fees or costs of withdrawal).
What are some key features of funds in general? (PART 3)
g) Private equity funds focused on leveraged buyout, venture capital funds, hold illiquid assets and cannot be marked to market on a daily basis.
h) Many of the terms used to describe funds are regulatory based – a fund choosing a particular type of structure and organisation to meet with regulations
e.g. hedge funds (relatively lightly regulated, may be
highly leveraged, can only be sold to professional investors), UCITS in Europe etc.
All funds of have to comply with regulatory requirements for issuing a prospectus and for reporting performance.
What’s the difference between a passive fund and an active fund?
Passive Fund: Tracks an index (like the FTSE100)
Active Fund: Has active fund managers attempting to make investment decisions (Typically fails to beat the market)
What is an investment benchmark?
this is a standard against which the performance of a security, mutual fund or investment manager can be measured. The most familiar are stock indices,
such as the S&P 500, the Russell indices, the FT-100, and the various MSCI indices (downloadable from Eikon and Datastream).
bond indices such as those produced by Barclays and by JP Morgan.
Why have Investment Benchmarks become important
- To help investors measure the performance of investment funds or other investment strategies and so decide which ones to pursue.
- To support so called ‘passive’ investment management, in which a portfolio is adjusted to ‘track’ a benchmark,
What has the increased use of Benchmarks done to the global financial market recently?
rapid increase in the volume of investment routed through “Exchange traded funds“
1/7 of world-wide stock exchange trading in 2013 was in ETF’s
How do you calculate pension pot return
= ay (1+r-f)T - 1/ r-f)
Where:
- pension contribution is 𝛼𝑦
- y is income
- T: Is years contributing to the pension (is to the power of (1+r-f)
- asset management fee charged on year average basis is f
- Real Investment Return: r
