L Pch4
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L Pch4 L Pch4 Presentation Transcript

  • Investments Chapter 4: Institutional Investors
  • Institutionalization: I
    • Institutional investors’ relative holdings of US equities have been increasing over the years (as in all OECD countries):
    Exhibit 4.1 Institutional holdings of corporate equities in the USA (end of year, in billions of dollars) Source: Federal Reserve Board “Flow of Funds”, www.federalreserve.gov.
  • Institutionalization: II
    • Several economic, demographic, and regulatory reasons:
    • 1. Institutional investors can achieve economies of scale.
    • 2. Demographic pressure on social security.
    • The changing role of banks (a key determinant in the US being regulation Q).
    • Regulation Q imposes a ceiling on the deposit rates that banks could pay to their clients, so that stability in the banking sector is secured.
  • Insurance Companies: I
    • Insurance companies are in the business of assuming the risks of adverse events (such as fires, floods, accidents, etc.) in exchange for a flow of insurance premiums.
  • Insurance Companies: II
    • Three Types of Insurance
    • 1. Life insurance.
    • 2. Non-life insurance (also known as property-casualty insurance).
    • 3. Re-insurance.
  • Pension Funds: I
    • An asset pool that accumulates over an employee’s working years and pays retirement benefits during the employee’s nonworking years.
  • Pension Funds: II
    • Three distinctions to make:
    Distinction 2 Pay-as-you-go system Advanced-funded system Distinction 3 Defined-benefit plan Defined-contribution plan Distinction 1 State pension plan Private pension plan
  • Investment Companies: I
    • An organization that pools investors’ money and invests it in securities according to a stated set of investment objectives (also known as a trust company).
  • Investment Companies: II
    • Investment companies run three basic types of funds:
    • 1. Open-end funds (mutual funds).
    • 2. Closed-end funds (investment trusts).
    • 3. Hedge funds .
  • Open-End Funds
    • Have no pre-determined amount of stocks outstanding. They can buy back or issue new shares at any point.
    • Price not determined by demand for the fund, but by an estimate of the current market value of the fund’s net assets per share (NAV) and a commission.
    • This commission can be added to the NAV as a load (sales commission) or treated as part of the ongoing expenses and included in the NAV (no-load mutual funds).
  • Closed-End Funds
    • A publicly traded investment company that has issued a specified number of shares and can only issue additional shares through a new public issue.
    • Pricing of closed-end funds is different from the pricing of open-end funds: the market price can differ from the NAV (know as the discount).
  • Closed-End Funds
    • The discount
    • Assume a fund is traded at P = €15; Assume also that its NAV is €16; In that case the fund’s discount is:
    • (15 – 16) / 16 = - 6.25%
    • Most of closed-end funds trade at discount.
  • Hedge Funds
    • A private unadvertised investment partnership, limited to institutions and high-net-worth individuals, that takes concentrated speculative positions.
    • Because of these concentrated speculative positions, hedge funds can be very risky.
    • L ong T erm C apital M anagement…