chapter 6- institutional investors

Question 1

what are the 2 different types of insurance?

Answer 1

casualty (accident)

life (savings product)

Question 2

what are the 2 types of pension scheme?

Answer 2

defined benefit

defined contribution

Question 3

what are the 3 trusts that funds can be?

Answer 3

unit trusts- aka mutual funds
investment trusts- aka investment companies
open-ended investment companies- aka OEIC’s

Question 4

what do institutional investors invest in?

Answer 4

asset classes- these include shares, bonds and real estate

Question 5

what is asset collection?

Answer 5

the proportions that institutional investors invest in shares bonds and real estate

Question 6

how are investment managers judged?

Answer 6

by quarterly performance

aim to be upper quartile

Question 7

what is active management?

Answer 7

the use of investment managers to select investments

Question 8

what is a cheaper alternative to active management?

Answer 8

index- tracking

Question 9

what is an example of an index tracker?

Answer 9

exchange traded funds (ETF’s)

they can be actively traded

Question 10

what does a sovereign’s wealth fund do?

Answer 10

invests its country’s wealth, often gained from natural resource exploitation
they are state controlled investment funds that channel a country’s surplus income- from natural resource sushi as oil and gas

Question 11

what are the 3 types of institutional investors?

Answer 11

insurance companies
pension funds
investment management companies
collectively known as buy side as they buy securities from the sell side (issuers and intermediaries)

Question 12

what are composites?

Answer 12

insurance companies that provide both life and casualty insurance

Question 13

what does casualty insurance cover?

Answer 13

cover against financial loss and loss of possessions

e.g. household insurance, holiday insurance

Question 14

what does life insurance cover?

Answer 14

insurance against death

this is to build up money so that when you die, your dependants have something to live off

Question 15

what are SIFI’s?

Answer 15

• systematically important financial institutions
• after the 2008 global financial crisis, insurance companies and fund managers were targeted because of the vast amounts of money they have at their disposal to invest

Question 16

what was the biggest insurer to go bust in the 2008 financial crisis and why?

Answer 16

AIG
it had a financial products unit that was writing credit default swaps (a type of derivative) on the risk of corporate borrowers defaulting
the crisis triggered a flood of credit default claims taking AIG down

Question 17

what type of scheme was/ is a pension scheme?

Answer 17

a defined benefits- you know from the outset what the benefit is
however this has changed as they have become too expensive to sustain

Question 18

what type of change has occurred regarding pensions?

Answer 18

• they have switched to defined contribution instead of defined benefits
• you know how much you pay however what it gives you when you recite is now unknown

Question 19

what can a sponsor do when a pension is fully funded?

Answer 19

• can take a contributions holiday where it suspends any contributions to the fund itself
• as a result, someone may seek more than one sponsor

Question 20

who are actuaries and what are they used for?

Answer 20

• they are statisticians who can work out the incidence of fatality from lifestyle profiles of a group of people big enough to be an effective sample
• used for pension funds
• this is how pension funds figure out their future liabilities (how many pensioners will live until what age)

Question 21

what do fund managers do?

Answer 21

they manage retail money for people who are individual clients and wholesale money for pension funds

Question 22

on what basis may a rich person have a fund manager?

Answer 22

discretionary- what and when to buy or sell

advisory- manager advises the client who takes the ultimate decision

Question 23

what is the most common type of fund structure?

Answer 23

unit trust

Question 24

what is an investment trust/ company?

Answer 24

• a public listed company
• they invest in shares of several hundred other public companies
• investors buy shares in it through the stock exchange, not through a fund manager

Question 25

why are investment trusts close- ended?

Answer 25

because the fund manager cannot issue additional shares at will so there is always a finite number in issue

Question 26

why are investment trusts good vehicles for income investors?

Answer 26

as companies, they don't have to pay all of their income and can use reserves to smooth out dividend payments from year to year this has allowed some investment trusts to achieve an unbroken and rising annual dividend for decades

Question 27

what is a DCM?

Answer 27

- discount control mechanism - allows them to buy their own shares when they fall to a discount and issue fresh shares when they are at premium - in this way, the share price is brought closer in line with net asset value

Question 28

what is a specialist type of investment trust?

Answer 28

- REIT- real estate investment trust - established in the US in 1960 - public listed companies that specialise in buying and holding commercial property

Question 29

what are the 3 types of net asset value?

Answer 29

DCM- discount control mechanism REIT- real estate investment trust OEIC- open ended investment company - bit of both DCM and REIT

Question 30

what will major institutional investors do with asset classes?

Answer 30

they will invest in all different asset classes globally to maximise investment return and minimise risk - aka, diversifying of portfolio

Question 31

how will asset allocation be driven?

Answer 31

- where you are based and what currency you are exposed to - your liabilities and how long/short-term they are will determine asset allocation mix - the more short term, the more your investments need to be liquid

Question 32

what are the different types of equity fund?

Answer 32

- growth- these funds specialise in identifying capital growth over the medium- long term - income- these funds invest in shares with strong dividend flows and in bonds- favoured by investors who need regular income - small-cap/ medium-cap- these focus on smaller listed companies where growth may be greater but at higher risk of going bust - VCT'S- venture capital- invest in unlisted start-ups and young businesses- high risk - index- simply track an index by sampling or holding every share or through derivatives - sector-specific- restrict themselves to a sector such as tech- for investors who want exposure to a specific industry - region-specific- markets outside the UK - international- invest outside the home country in whichever markets seem attractive at the time

Question 33

what is a fund-of-funds?

Answer 33

a fund that invests in other funds a disadvantage is the double level of fees one set to the manager and other to the one who invests

Question 34

what does it mean when market professionals are said to discount the future?

Answer 34

reflect in today's price expectations of what is likely to happen in the future

Question 35

what do momentum investors do?

Answer 35

they try and spot market moves that reflect underlying sentiment then jump aboard the market bandwagon and jump off it again before it collapses

Question 36

what is churn when discussing investment performance?

Answer 36

where a manager starts to buy and sell frantically in the hope of finding the right combination of investments to lift his or her performance It is expensive to churn a profile

Question 37

what is shareholder activism?

Answer 37

the constant complaint that shareholders don't hold managements to account hedge funds can take it to extremes, pressuring companies they invest in to sell assets to realise value

Question 38

what is passive investment?

Answer 38

programming a computer to do stock selection for you

Question 39

what are ETFs?

Answer 39

passive funds that track index but are traded on a stock exchange experience price changes on a minute- by- minute basis throughout the trading day they allow immediate exposure to a market without stock picking

Question 40

how do hedge fund managers expect to be paid?

Answer 40

2 and 20 2% of assets under management 20% on any increase in value

Question 41

what are the 3 I's?

Answer 41

issuers intermediaries investors