quiz 2 Flashcards
Role of funds managers?
How they contribute to functions of finance?
Cost involved?
Who has the investment risk?
Pool investor funds and arrange collective investment
Contribute to flow of funds function through direct financing
Cost = fees paid to funds manager
Risk remains with contributor
Main groups of fund managers?
supperannuation, life insurance, public unit trusts
Asset classes for funds management investments
equities and units in trusts interest earning securities cash and deposits overseas assets alternative investments
Supperannuation... Long or short term? two types of schemes? Which has higher impact: Contributions or rate of return and compounding? Two types of asset classes? Two types of investment strategies?
Long-term
Accumulation schemes = produce lump sump dependant on contribution sizes and rate of earnings
Defined benefit schemes = pay specified benefit (either as lump sum or pension) to retiree
Rate of return and compounding
Growth assets = equity and property securities with high risk and high return
Defensive assets = low risk and low return bonds, bank deposits and money market securities = rarely experience negative returns
Balanced portfolios = balanced mix between growth and defensive assets
Growth portfolios = favour growth assets
Supperannuation…
Three groups comprising the supperannuation industry
What are trustees?
NFP schemes by employers (corporate or public service schemes) and trade unions (industry schemes) (APRA)
FP schemes = professional fund managers (retail schemes = also have lower returns due to higher fees) (APRA)
self managed funds = operate under ATO rules) ( invest less in equities and more in bank accounts)
Trustee = have fiduciary duty of care to a schemes members and are licensed and supervised by APRA. they ensure investment managers allocate funds according to each contributors choice and in a manner consistent with the trust deed to maximise accumulated sum.
Public unit trusts... regulator? what? how it works? Purpose? costs? benefits?
regulator = ASIC what = collective investment schemes that raise funds by selling units to the public, which represent a share of their assets works = funds allocated by trust investment manager = assets specified by trust deed = trustee oversees Purpose = established by financial institutions to earn fees costs = entry and exit fees and management fees benefits = provide investors with access to whiolesale markets + expertise of professional managers + provide liquidity through ASX listing or trading with investors
types of Public units trusts…
Two types
Two sub types for each type + outline
traditional public unit trusts + alternative investments
Traditional PUT = property or equity
AI = hedge funds or private equity funds
Property trusts = established by financial institution or property developer to acquire large properties = most ASX listed = close ended (set number of units) = unit holders get revenue less fees = debt funds which expose unit holders to interest rate risk and funding risk
Equity trusts = invest in shares = income, balanced or growth objectives = open-ended = usually unlisted
Hedge funds = complex investment strategies and high levels of debt = charge performance fees and management fees = aggressive managers seeking high returns and taking large risks = long or short strategies, derivatives, high frequency trading. = small in AUS and ASIC regulated = Funds of hedge funds are hedge funds investing in hedge funds to diversify investment.
Private equity funds = aqcuire companies to improve their financial performance and then resell for profit = large debt = lack liquidity
4 benefits of collective investment?
Access to wholesale investments
Economies of scale that lower transaction costs, such as research and trading commissions
Diversified investments that lower risk for an expected rate of return
Investment expertise
Outline two approaches to investment management?
Active = not consistent with EMH = seek to outperform market through asset selection and timing of trades = higher costs = identify under or over valued assets to buy former and sell latter = technical analysis (historical data + not strong evidence, yet still widely used + momentum or contrarian investors: M - buy when price rises believing will continue to do so C - buy when price falls believing it has fallen too much believe markets overreact to news) or fundamental analysis (calculate PV of expected future payments)
Passive = consistent with EMH = seek to form index funds that aim to replicate the return on a benchmark index = lower costs = for even lower costs hold fewer shares and accept small tracking error = management expense ratios usually half of active funds.
How to assess performance of fund managers?
Why use fund rating agencies?
How fund ratings agencies work?
Can higher-rated managers continue to outperform always?
Contrast performance of active and passive investments.
assessed in terms of the returns achieved given the risks taken = comparisons between managers in the same asset class Fund rating agencies = because returns are unstable and past returns are not usually a good indicator of future returns Fund ratings agencies = managers rated on quantitative risk and return history and qualitative assessment of managers abilities No = they can continue to outperform, but not consistently. Passive = achieve higher after-fess returns Active = Some active can outperform passive for a number of years, or within a particular asset class
Who is the venture capital market for?
Who invests capital?
Business angels?
Venture capital fund managers?
Who = Emerging firms aspiring to grow into large companies
Who = Patient, risk-taking investors
Business angels = participate in running of firm during development stage
venture capital fund managers = raise funds from super funds, insurance companies, banks and wealthy individuals = invest across multiple new businesses to spread risk = usually represented on the board = harder to attract this type of investment capital (many firms fail to appeal to CVFMs)
When is a firm considered investment ready?
What does this mean for the firm and alternatively for capital investors?
Are Venture capital investments low risk low return?
Achieved substantial size
effective management structure
produce regular financial reports
history of profitability
Firm can now raise capital through IPO and IPO can allow venture capital investors to exit
No they are high risk and high return = can completely loose amount invested
7 features of ordinary shares?
represent ownership of company no maturity date can have ownership transferred limited liability entitle owner to share of profits entitle owners to vote in company elections potential for capital gains
4 features of preference shares?
represent ownership of a company
pay promised dividend which have priority over ordinary dividends
have restricted voting rights
variety of features like non-participating, cumulative, converting, redeemable
is assessing a shares value easy? Approaches for doing so? How to interpret P/E ratio? What does P/E ratio reflect? Industry P/E's? Assumptions of P/E future share price estimation technique?
No = uncertainty of future payments
technical analysis or fundamental analysis
fundamental analysis = factor in risks to determine share present value = top-down assessment (global economy»_space; economy»_space; sector»_space; industry»_space; firms management) = bottom-up (P/E ratios and/or gordon’s dividend growth model)
High P/E = may mean expected earnings will grow quickly
Low P/E = may mean earnings are risky
P/E ratios = reflect market’s assessment of the future growth rate in the firm’s earnings and the riskiness of that growth.
Industry P/E’s provide a benchmark against which individual shares can be compared
Assumptions = change in earnings is permanent + P/E ratio is unaffected by changed earnings.
Under the capital asset pricing model explain each of the three terms?
Return on Risk-free = current risk-free rate, such as yield on treasury bills
Return on market = return on the market protfolio
Beta = systematic risk = riskiness of share relative to riskiness of market
IPO?
Are institutional investors only interested in small IPOs?
Who arranges IPOs and are they expensive?
3 advantages of an IPO and 4 disadvantages
IPO = first issue of shares to the public by a company for the purpose of posting on an exchange = raises additional capital to fund growth and/or allows some or all of the owners to sell some or all of their investment.
No = they are interested in large IPOs
yes expensive and investment banks and stockbroking firms arrange them
Advantages = additional equity, provides liquidity, enhances company capacity to remunerate management and employees
disadvantages = expensive, ownership dilution of continuing owners, agency costs from separation of ownership and management, encourage a short-term performance bias
