INSTITUTIONAL INVESTORS

Q: what are the two main types of investment?

(1) ACTIVE - individual investment managers picking stocks - associated w/ fees of 1-3% of assets under management (AUM) (2) PASSIVE - index-tracked - associated w/ v low fees, e.g. 0.05% AUM

Q: what kinds of insurance are there?

(1) CASUALTY/NON-LIFE INSURANCE - compensating you for insured risks (e.g. home, car, holiday insurance) (2) LIFE ASSURANCE - providing money for your dependants to live on after you die ('Composites' do both)

Q: what types of investor are there (broadly speaking)?

(1) CHARTISTS/TECHNICAL ANALYSTS - use historic data to predict market movement (2) MOMENTUM INVESTORS/TREND-FOLLOWERS - jump on the bandwagon/follow the trend (3) CONTRARIANS - do the opposite of what everyone else is doing (4) VALUE INVESTORS - find companies that are undervalued on their fundamentals, and stick with them (assoc w/ Warren Buffett AKA 'The Wizard of Omaha')

Q: what types of pension fund are there?

(1) DEFINED BENEFITS (rare now) - you know how much you get (2) DEFINED CONTRIBUTIONS (common now) - you know how much you must pay. Effectively you accumulate a pot of money and then use it to buy an annuity (= a contract that pays a fixed sum every year), provided by insurance companies.

Q: what are the main asset classes in which fund managers invest?

(1) EQUITIES (shares) (2) FIXED-INCOME (bonds) (3) CASH (4) CURRENCIES & DERIVATIVES (5) COMMODITIES (e.g. oil, gold) (6) REAL ESTATE (e.g. forestry, farmland, commercial property) (7) INFRASTRUCTURE (e.g. transport, schools/hospitals, energy assets)

Q: what is an institutional investor?

(1) FUND MANAGERS (AKA investment management companies or asset/wealth/investment managers) (2) INSURANCE COMPANIES (3) PENSION FUNDS

Q: what types of fund manager are there?

(1) PRIVATE EQUITY FUNDS - launched by private equity houses - investing in (mature) private companies (2) VENTURE CAPITAL - investing in startups / young businesses (3) HEDGE FUNDS - using derivatives to speculate and to short the market (4) SOVEREIGN WEALTH FUNDS - state-controlled channel for extra state income - investing for long-term growth

Q: what are the main types of fund structure?

(1) UNIT TRUST (AKA US 'mutual fund') - a trust (e.g. US 'money market funds') (2) INVESTMENT TRUST (AKA 'investment company') (orig in 1860s Edinburgh) (3) OPEN-ENDED INVESTMENT COMPANY (OEIC)

Q: what are the key features of a pension fund?

- ACTUARIES assess the risk of fatality in a given population and therefore the future liabilities of the fund - PLAN SPONSORS act as host companies to which the fund is attached. -- If 'fully funded' (i.e. enough assets to meet future liabilities), the sponsor may take a 'contributions holiday'. -- NB pensions in the public sector are unfunded, and instead paid out of taxes (cf European pension structures). - The fund will usually hire an in-house or external fund manager to manage some or all of their assets. - The fund may give its portfolio to insurers to be managed on a SEGREGATED or a POOLED basis (= 'collective investment scheme')

Q: what are the key features of hedge funds?

- Aim for absolute returns - High fees - usu 2% of assets under management + 20% of any increase in value - Highly leveraged - May 'lock in' investors for up to 5 years - May use 'quants' (algorithms) to spot market anomalies and/or 'macros' to spot long-term patterns

Q: what are the consequences of how fund manager performance is judged?

- CHURN - fund managers may start to buy and sell frantically to lift their performance - SHORT-TERMISM - fund managers become short-term (thinking in terms of 3-month windows), when usually their true objective is long-term performance. These problems are increasingly addressed by activist shareholders holding fund managers to account.

Q: how do funds combine active and passive investment?

- Funds may have a passive core, surrounded by an active periphery, where they seek to achieve above-market performance ('ALPHA')

Q: what types of fund are there?

- GROWTH ('DEFENSIVE') - aiming for growth in the medium- to long-term - INCOME ('CYCLICAL') - aiming for consistent dividends - SMALL-CAP/MID-CAP - investing in smaller, higher-risk companies (ct 'BLUE-CHIP' = big companies) - VENTURE CAPITAL TRUSTS - investing in start-ups and young businesses - high-risk, for sophisticated investors - INDEX-LINKED - tracking an index e.g. the FTSE-100, FTSE-250, All-Share, S&P 500, Dow Jones, Nasdaq, Nikkei-225, Hang Seng - SECTOR-SPECIFIC - investing in e.g. telecoms, tech, financials - REGION-SPECIFIC - investing in partic region (X 'ex'-Y = X excluding Y) - INTERNATIONAL - outside the home country - FUND OF FUNDS (AKA 'MULTI-MANAGER FUND') - investing in other funds (thus subject to dual fees)

Q: what do fund managers do?

- Invest money to increase it - Clients may be retail (wealthy individuals) or wholesale (pension funds) - Decision-making may be discretionary (i.e. the fund manager has the final say) or advisory (i.e. the client has the final say)

Q: key features of an investment trust?

- Investors buy shares in the investment company on the stock exchange, NOT via the fund manager - CLOSED-ENDED - only a limited number of shares can be issued - DIVERSIFIED - Subject to GEARING - i.e. borrowing to increase market exposure - Better for ILLIQUID MARKETS (e.g. venture capital, emerging markets, property) - Better for INCOME INVESTORS - Subject to a DISCOUNT CONTROL MECHANISM: where the share price varies from the net asset value of the underlying investments, the company may buy its own shares at a discount to the net asset value and then issue fresh shares when it is at a premium

Q: key features of a unit trust?

- Investors buy units directly from the fund manager. - OPEN-ENDED = can issue as many units as investors will buy - When an investor wants to exit, the fund manager must immediately liquidate investments to meet the redemption. Therefore, best for LIQUID MARKETS

Q: how does index-tracking work?

EITHER (a) SAMPLING = buy a representative sample of shares in the index, OR (b) DERIVATIVES = use e.g. index swaps, index futures, or index options

Beta

How closely the performance of a share correlates with overall market performance

Q: what is insurance?

Risk assessment + investment management

Q: what is asset allocation?

The way in which a fund decides which asset classes to invest in, to achieve the best balance of risk (both systemic, i.e. market-wide, and specific) and reward

Q: how is the performance of fund managers (excluding hedge funds) judged?

There is a quarterly assessment against a benchmark average. Fund managers aim to be in the top 25%/ 'upper quartile'.