L Pch4

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L Pch4

  1. 1. Investments Chapter 4: Institutional Investors
  2. 2. Institutionalization: I <ul><li>Institutional investors’ relative holdings of US equities have been increasing over the years (as in all OECD countries): </li></ul>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.
  3. 3. Institutionalization: II <ul><li>Several economic, demographic, and regulatory reasons: </li></ul><ul><li>1. Institutional investors can achieve economies of scale. </li></ul><ul><li>2. Demographic pressure on social security. </li></ul><ul><li>The changing role of banks (a key determinant in the US being regulation Q). </li></ul><ul><li>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. </li></ul>
  4. 4. Insurance Companies: I <ul><li>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. </li></ul>
  5. 5. Insurance Companies: II <ul><li>Three Types of Insurance </li></ul><ul><li>1. Life insurance. </li></ul><ul><li>2. Non-life insurance (also known as property-casualty insurance). </li></ul><ul><li>3. Re-insurance. </li></ul>
  6. 6. Pension Funds: I <ul><li>An asset pool that accumulates over an employee’s working years and pays retirement benefits during the employee’s nonworking years. </li></ul>
  7. 7. Pension Funds: II <ul><li>Three distinctions to make: </li></ul>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
  8. 8. Investment Companies: I <ul><li>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). </li></ul>
  9. 9. Investment Companies: II <ul><li>Investment companies run three basic types of funds: </li></ul><ul><li>1. Open-end funds (mutual funds). </li></ul><ul><li>2. Closed-end funds (investment trusts). </li></ul><ul><li>3. Hedge funds . </li></ul>
  10. 10. Open-End Funds <ul><li>Have no pre-determined amount of stocks outstanding. They can buy back or issue new shares at any point. </li></ul><ul><li>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. </li></ul><ul><li>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). </li></ul>
  11. 11. Closed-End Funds <ul><li>A publicly traded investment company that has issued a specified number of shares and can only issue additional shares through a new public issue. </li></ul><ul><li>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). </li></ul>
  12. 12. Closed-End Funds <ul><li>The discount </li></ul><ul><li>Assume a fund is traded at P = €15; Assume also that its NAV is €16; In that case the fund’s discount is: </li></ul><ul><li>(15 – 16) / 16 = - 6.25% </li></ul><ul><li>Most of closed-end funds trade at discount. </li></ul>
  13. 13. Hedge Funds <ul><li>A private unadvertised investment partnership, limited to institutions and high-net-worth individuals, that takes concentrated speculative positions. </li></ul><ul><li>Because of these concentrated speculative positions, hedge funds can be very risky. </li></ul><ul><li>L ong T erm C apital M anagement… </li></ul>

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