Overview of Mutual Funds and Financial Sector Development

527 views

Published on

Published in: Economy & Finance, Business
0 Comments
0 Likes
Statistics
Notes
  • Be the first to comment

  • Be the first to like this

No Downloads
Views
Total views
527
On SlideShare
0
From Embeds
0
Number of Embeds
2
Actions
Shares
0
Downloads
12
Comments
0
Likes
0
Embeds 0
No embeds

No notes for slide

Overview of Mutual Funds and Financial Sector Development

  1. 1. Overview of Mutual Funds and Financial Sector Development Mike Lubrano, IFC NBFI Video Conference 28 February - 1 March 2001 Washington DC 1
  2. 2. Introduction and overview • The role of investment funds • How they work; structures • The scale of the funds market • How they developed internationally 2
  3. 3. What is an investment fund? • Entity publicly offering shares or units • Invests the money attracted mainly in publicly offered securities • Manages money as a single pooled portfolio • Investors have no control over portfolio decisions 3
  4. 4. What Investment Funds are Not • Risk taking intermediaries • Banks / Quasi-banks • Captive Finance Subsidiaries • Instant Liquidity Generators • Alter Egos 4
  5. 5. What funds do: intermediate Savers: individuals, companies, governments Intermediaries: banks; insurance, pension and investment funds Brokers, dealers bonds money shares loans Markets Primary dealers, investment banks Borrowers: governments, companies, individuals 5
  6. 6. What funds do for investors • Diversify risk • Reduce costs • Offer professional management • Protect investors: highly transparent • Increase savings choice – Can be base for personal pensions • More flexible than contractual savings • Lower cost than contractual savings 6
  7. 7. What funds do for economies • Mobilize savings • Widen and deepen capital markets • Balance foreign capital flows • Provide longer term financing • Pressure for risk reduction, improved performance • Create demand for – innovation, new products (derivatives) – better infrastructure – better disclosure 7 – corporate governance
  8. 8. How Funds Work Gains from sales of Assets Money Investor Fund Money Issuers Fund Securitie Shares s Distributions Dividends; Interest 8
  9. 9. Key Players and Their Roles • Sponsor - creates fund • Portfolio manager – chooses assets • Administration – operates fund • Custody – safekeeps assets • Marketing – sells the fund to investors • Oversight – checks the fund operates legally and in the interests of investors 9
  10. 10. One Common Approach Management Regulator Company regulates regulates operates Fund safekeeps assets audits Auditor Custodian 10
  11. 11. Legal Structures of Funds Structure Issue Responsible Safekeeping to Investors of assets Company Shares Directors Custodian Trust Units Trustee Trustee Contractual Units Management Custodian Company 11
  12. 12. Types of Funds Type Capital Issuance Trading Open end Variable Continuous At NAV via management company Closed end Fixed One off At market price on exchange Interval Variable One off / On exchange / periodic periodic redemptions Open end/ Variable Continuous On exchange / Exchange also traded redeemable 12
  13. 13. Open versus closed Cash 5.0% Issue A Cash 5.0% Issue A Issue H 15.0% Issue I 15.0% 10.0% 10.0% |ssue H 10.0% Issue G Issue B 15.0% 10.0% Issue B 15.0% Issue G 10.0% Issue F Issue C Issue F 15.0% 10.0% 10.0% Issue E 10.0% Issue C Issue E 15.0% 10.0% Issue D 10.0% 13
  14. 14. Open end funds need liquid markets • Constantly buy and sell assets to meet purchases and sales of fund shares or units • Must be able to value assets correctly to set a correct price on shares or units • Can present problem in emerging markets • Closed ended funds suit illiquid markets better 14
  15. 15. Significance of open ended funds (Source: BIS 1998) As at US Japan France UK end 1996 As % of 46 9 34 16 GDP As % of 15 4 18 6 market cap 15
  16. 16. Size of open end fund markets: End 1998 (source: ICI, Cadogan) Country Value of funds Number of - $ billion funds Chile 3.4 105 France 621 6,335 Hungary 1.4 72 Japan 359 4,344 Korea 202 13,442 UK 297 1,680 US 5,766 7,382 16
  17. 17. % ownership of mutual funds by income groups in the US (source: ICI) 90 80 70 < $25,000 60 $25,000 - 34,999 50 $35,000 - $49,999 $50,000 - $74,999 40 $75,000 - $99,999 30 >$100,000 20 10 0 17
  18. 18. How funds developed internationally Spontaneously Artificially • First fund enabled • Created to serve the investor of specific need – eg modest means to – Assist privatisation access a – Bypass poor diversified banking system portfolio: 1868 in – Kick start stock the UK markets – Retail government bonds 18
  19. 19. Features Spontaneous Artificial • More sustainable • Less sustainable since develop once unless consistent markets and effort made: often pre- expertise exist date markets so • Market unregulated expertise lacking and at start operation hindered • Market often poorly regulated at start 19
  20. 20. Outcomes – not dissimilar Spontaneous Artificial • Scandals occur so • Scandals occur eg regulation is Czech Privatisation introduced Funds, Korea, Mexico • New scandals occur • Regulation and • Regulation and markets are improved markets are improved • Or market fails to • Examples: US develop Investment Companies Act 1940, UK Financial Services Act 1986 20
  21. 21. Candidates for Regulation • Funds (securities regulator) • Fund management company (securities regulator) • Custodian or trustee (securities regulator and banking regulator – often banks) • Fund salespeople (securities regulator) • Auditor (professional ethics – additional standards may be needed) 21
  22. 22. Measures & Objectives Regulatory Measure Anti- Market Asymmetric Systemic competitive Misconduct Information Instability Behavior Competition Regulation Antitrust/competition policy Market Conduct Regulation Disclosure standards (assets;fees) Comparable presentation of results Marketing/advertising rules (KYC rules) Valuation (NAV at MTM) ??(Korea) Limits on permitted activities (conflict of interest; self-dealing) Limit basis for calculating fees ??(Korea) Prudential Regulation Licensing; fit and proper ??(Korea) Legal separation; segreg. of assets ??(Korea) [Minimum capital requirements] ??(Korea) Legal investment ??(Korea) Liquidity requirements ??(Korea) Leverage limitations ??(Korea) Diversification -concentration limits ??(Korea) Private oversight (custodians, audit) ??(Korea) Redundant Regulations Fee Caps ?? [Minimum Capital Requirement] ??(Korea) 22
  23. 23. To make funds work, you need: • Sufficient demand (savings) • Adequate supply of quality assets • Appropriate legal framework • Competent regulatory body with sufficient resources • Capacity to effectively enforce law • Distribution channels 23
  24. 24. .. And .. • Competent fund operators with sufficient capital • Operational infrastructure (exchanges, custody, brokerage, etc) • Reliable money transmission • Appropriate accounting standards • Neutral or beneficial tax • Efficient disclosure mechanisms 24
  25. 25. If you don’t have some or all of these… • Does the political will exist to create them? It should, because: • Funds mobilize savings, deepening markets • Savings finance corporate and government borrowing • Domestic savings reduce impact of foreign flows • Use for private pension provision Need political stability: long haul 25
  26. 26. Where to start? • Training all those relevant to tasks • Create strategy with tasks - clear leadership and accountability • Create legal, regulatory framework, fiscal and accounting framework • Create regulatory body • Brief potential fund managers, custodians, etc. on opportunities 26

×