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Mutual funds and the Institutional environment <ul><li>Chapter 4: overview of institutional investing and institutions’ ro...
A. Institutional Investors <ul><li>Pension funds </li></ul><ul><li>Endowment funds </li></ul><ul><li>Financial institution...
Constraints in Portfolio Management  <ul><li>Liquidity </li></ul><ul><li>Investment horizon </li></ul><ul><li>Limits on co...
 
B. Mutual Funds <ul><li>Major categories: </li></ul><ul><li>Money market funds </li></ul><ul><li>Equity funds (market cap,...
Net Asset Value <ul><li>Used as basis for valuation of mutual fund shares </li></ul><ul><li>Calculation (once per day): </...
Open-End vs. Closed-End Funds <ul><li>Shares Outstanding </li></ul><ul><li>Closed-end </li></ul><ul><ul><li>no change unle...
Costs of Investing in Mutual Funds <ul><li>Sales charges </li></ul><ul><ul><li>Front-end load (%, pay when purchase) </li>...
Exchange-Traded Funds <ul><li>Since 1993 </li></ul><ul><li>ETFs, iShares, iUnits </li></ul><ul><li>Passive versus active i...
ETFs <ul><li>Clear Indexes LLC runs a student competition: Create the next ETF </li></ul><ul><ul><li>2007 winner: US Expor...
Segregated Funds <ul><li>An insurance contract that provides investment management (mutual fund) plus protection </li></ul...
Main Differences <ul><li>3 main differences from mutual funds </li></ul><ul><ul><li>Bankruptcy protection (governed by the...
Pension Plans <ul><li>Two major types of pension plan </li></ul><ul><ul><li>DB </li></ul></ul><ul><ul><li>DC (In the U.S.,...
Pension Funds as Institutional Investors <ul><li>Investment of pension assets </li></ul><ul><li>All bonds (to “match” liab...
Ontario Teachers’ Pension Plan <ul><li>In 1990, the fund's $19 billion of assets were all in Ontario government bonds  </l...
OTPP <ul><li>How do assets in the fund grow?  </li></ul><ul><li>2006 figures </li></ul><ul><ul><li>Stock: </li></ul></ul><...
Contrast with 2008 Figures <ul><ul><li>Stock: </li></ul></ul><ul><ul><li>Net assets  $87.4 billion </li></ul></ul><ul><ul>...
CPPIB <ul><li>Incorporated as a federal crown corporation in 1997 </li></ul><ul><li>Investments began in 1999. Before: 100...
CPPIB <ul><li>What types of assets are held? Allocation? </li></ul><ul><ul><li>I. Equities (59.9%) </li></ul></ul><ul><ul>...
Responsible Investing Policy <ul><li>A non-financial factor/policy </li></ul><ul><li>Example </li></ul><ul><ul><li>Norwegi...
Responsible Investing Policy <ul><li>McLean Budden’s non-financial screen for their “Select” family of funds </li></ul><ul...
CPPIB <ul><ul><li>“  CPPIB has committed to build an engagement capability and use its ownership positions in companies to...
Both CPPIB and OTPP <ul><li>Investment belief: Artificial constraints decrease returns and/or increase risk over time  </l...
Global perspective on size <ul><li>Largest funds in Canada </li></ul><ul><ul><li>CPPIB </li></ul></ul><ul><ul><li>Septembe...
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PPT

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PPT

  1. 1. Mutual funds and the Institutional environment <ul><li>Chapter 4: overview of institutional investing and institutions’ role in portfolio selection and management </li></ul><ul><ul><li>Institutional investors </li></ul></ul><ul><ul><li>Mutual funds / ETFs / Segregated funds </li></ul></ul><ul><ul><li>Pension Funds </li></ul></ul>
  2. 2. A. Institutional Investors <ul><li>Pension funds </li></ul><ul><li>Endowment funds </li></ul><ul><li>Financial institutions, e.g., banks and insurance companies </li></ul><ul><li>Large portfolio managers </li></ul><ul><ul><li>Mutual Funds, hedge Funds … etc. </li></ul></ul>
  3. 3. Constraints in Portfolio Management <ul><li>Liquidity </li></ul><ul><li>Investment horizon </li></ul><ul><li>Limits on country holdings </li></ul><ul><li>Limits on sector holdings </li></ul><ul><li>Limits on individual firm holdings </li></ul><ul><li>Limits on trading strategies </li></ul><ul><li>Regulatory constraints </li></ul><ul><li>ESG </li></ul>
  4. 5. B. Mutual Funds <ul><li>Major categories: </li></ul><ul><li>Money market funds </li></ul><ul><li>Equity funds (market cap, style, sector) </li></ul><ul><li>Fixed-income funds </li></ul><ul><li>Income funds </li></ul><ul><li>Balanced funds </li></ul><ul><li>Asset allocation funds </li></ul><ul><ul><li>Have a market-timing component </li></ul></ul><ul><li>Index funds </li></ul>
  5. 6. Net Asset Value <ul><li>Used as basis for valuation of mutual fund shares </li></ul><ul><li>Calculation (once per day): </li></ul>
  6. 7. Open-End vs. Closed-End Funds <ul><li>Shares Outstanding </li></ul><ul><li>Closed-end </li></ul><ul><ul><li>no change unless new shares are offered </li></ul></ul><ul><ul><li>Traded on stock exchanges or OTC </li></ul></ul><ul><li>Open-end </li></ul><ul><ul><li>changes when new shares are sold or old shares are redeemed </li></ul></ul><ul><li>Pricing </li></ul><ul><li>Open-end: net asset value (NAV) </li></ul><ul><li>Closed-end: premium or discount to NAV </li></ul>
  7. 8. Costs of Investing in Mutual Funds <ul><li>Sales charges </li></ul><ul><ul><li>Front-end load (%, pay when purchase) </li></ul></ul><ul><ul><li>Back-end load (%, pay when redeem) </li></ul></ul><ul><ul><ul><li>Typically declines with the holding period </li></ul></ul></ul><ul><ul><li>No load (early redemption fee may be charged) </li></ul></ul><ul><li>Operating expenses </li></ul><ul><ul><li>Management expense ratio (MER) </li></ul></ul><ul><ul><li>Expressed as a percentage of total assets </li></ul></ul>
  8. 9. Exchange-Traded Funds <ul><li>Since 1993 </li></ul><ul><li>ETFs, iShares, iUnits </li></ul><ul><li>Passive versus active investing </li></ul><ul><li>Compare MER with that of index funds </li></ul><ul><li>Broad index as well as specialized ETFs: Fixed income, sector, international, style, leveraged </li></ul><ul><li>http://www.nyse.com/about/listed/funds.html </li></ul><ul><li>http://www.ishares.ca </li></ul>
  9. 10. ETFs <ul><li>Clear Indexes LLC runs a student competition: Create the next ETF </li></ul><ul><ul><li>2007 winner: US Exporters Index ETF </li></ul></ul><ul><li>ETFs are different from closed-end mutual funds </li></ul><ul><ul><li>There is always an underlying index </li></ul></ul><ul><ul><li># of shares outstanding changes daily (ETF manager issues and redeems shares to keep the ETF in line with the underlying index) </li></ul></ul>
  10. 11. Segregated Funds <ul><li>An insurance contract that provides investment management (mutual fund) plus protection </li></ul><ul><li>Offered by insurance companies, but “segregated” from the other assets of the insurance company </li></ul><ul><li>Some have in-house fund management, e.g., TransAmerica Life </li></ul><ul><li>May also wrap an insurance policy around an existing mutual fund, e.g., Great-West life policy around MacKenzie Financial funds </li></ul><ul><li>MERs e.g., MacKenzie Financial: 2.7 - 2.9% </li></ul>
  11. 12. Main Differences <ul><li>3 main differences from mutual funds </li></ul><ul><ul><li>Bankruptcy protection (governed by the Insurance Act) </li></ul></ul><ul><ul><ul><li>Fund shielded from creditors in case of personal bankruptcy </li></ul></ul></ul><ul><ul><li>Protection of principal if held for 10 yrs + </li></ul></ul><ul><ul><ul><li>75% by law, but new generation 100% </li></ul></ul></ul><ul><ul><li>Death benefit </li></ul></ul><ul><ul><ul><li>Within 10 years, beneficiary receives the greater of principal or market value </li></ul></ul></ul>
  12. 13. Pension Plans <ul><li>Two major types of pension plan </li></ul><ul><ul><li>DB </li></ul></ul><ul><ul><li>DC (In the U.S., 401(k) plans) </li></ul></ul><ul><ul><li>Hybrid </li></ul></ul><ul><li>Who bears the risk in each type? </li></ul>
  13. 14. Pension Funds as Institutional Investors <ul><li>Investment of pension assets </li></ul><ul><li>All bonds (to “match” liabilities) </li></ul><ul><li>Stocks and bonds (traditional: 60%, 40%) </li></ul><ul><li>Stocks and bonds + alternative assets </li></ul><ul><ul><li>A pioneer: British Rail Pension Plan in the 70s invested in a portfolio of art </li></ul></ul><ul><ul><li>More generally: real estate, infrastructure, private equity, 130/30, hedge funds </li></ul></ul>
  14. 15. Ontario Teachers’ Pension Plan <ul><li>In 1990, the fund's $19 billion of assets were all in Ontario government bonds </li></ul><ul><li>$108 on December 31, 2007 </li></ul><ul><li>$87.4 on December 31, 2008 </li></ul><ul><li>278,000 plan members </li></ul><ul><li>Manage some of its own assets </li></ul><ul><ul><li>Active in derivatives/hedge funds </li></ul></ul><ul><ul><li>Has a private capital division with $16 billion in assets </li></ul></ul><ul><li>Largest professional single pension plan in Canada </li></ul>
  15. 16. OTPP <ul><li>How do assets in the fund grow? </li></ul><ul><li>2006 figures </li></ul><ul><ul><li>Stock: </li></ul></ul><ul><ul><li>Net assets $108.5 billion </li></ul></ul><ul><ul><li>Flow: </li></ul></ul><ul><ul><li>Investment income $4.7 billion   </li></ul></ul><ul><ul><li>Benefits paid $4.0 billion   </li></ul></ul><ul><ul><li>Annual contributions* $2.1 billion   </li></ul></ul><ul><li>*Teachers and the Ontario government </li></ul>
  16. 17. Contrast with 2008 Figures <ul><ul><li>Stock: </li></ul></ul><ul><ul><li>Net assets $87.4 billion </li></ul></ul><ul><ul><li>Flow: </li></ul></ul><ul><ul><li>Investment income ($19 billion)   </li></ul></ul><ul><ul><li>Benefits paid $4.2 billion   </li></ul></ul><ul><ul><li>Annual contributions* $2.3 billion   </li></ul></ul>
  17. 18. CPPIB <ul><li>Incorporated as a federal crown corporation in 1997 </li></ul><ul><li>Investments began in 1999. Before: 100% provincial bonds </li></ul><ul><li>Largest pension fund in Canada </li></ul><ul><ul><li>$127.7 billion (June 30, 2008) </li></ul></ul><ul><ul><li>$117.4 billion (September 30, 2008) </li></ul></ul><ul><ul><li>$108.9 billion (December 31, 2008) </li></ul></ul><ul><ul><li>$116.6 (June 30, 2009) </li></ul></ul><ul><li>17 million plan members </li></ul><ul><li>http://www.cppib.ca </li></ul>
  18. 19. CPPIB <ul><li>What types of assets are held? Allocation? </li></ul><ul><ul><li>I. Equities (59.9%) </li></ul></ul><ul><ul><ul><li>Public: 46.8% (Domestic: less than half) </li></ul></ul></ul><ul><ul><ul><li>Private: 13.1% </li></ul></ul></ul><ul><ul><li>II. Fixed income (26.8%) </li></ul></ul><ul><ul><ul><li>Federal and provincial bonds </li></ul></ul></ul><ul><ul><li>III. Inflation-sensitive assets (returns tied to inflation) (13.3%) </li></ul></ul><ul><ul><ul><li>Real estate: 6.2% </li></ul></ul></ul><ul><ul><ul><li>Infrastructure: 3.1% </li></ul></ul></ul><ul><ul><ul><li>Real-return bonds: 4% </li></ul></ul></ul>
  19. 20. Responsible Investing Policy <ul><li>A non-financial factor/policy </li></ul><ul><li>Example </li></ul><ul><ul><li>Norwegian Government Pension Fund does not invest in: </li></ul></ul><ul><ul><ul><li>Walmart (human rights issues) </li></ul></ul></ul><ul><ul><ul><li>Boeing, Honeywell International (nuclear weapons) </li></ul></ul></ul><ul><ul><ul><li>Freeport McMoRan Cooper and Gold (environmental damages) </li></ul></ul></ul>
  20. 21. Responsible Investing Policy <ul><li>McLean Budden’s non-financial screen for their “Select” family of funds </li></ul><ul><ul><li>Exclude companies with more than 10% of their gross annual revenue from the sale of tobacco, alcohol, gambling facilities, pornography, and armaments. </li></ul></ul>
  21. 22. CPPIB <ul><ul><li>“ CPPIB has committed to build an engagement capability and use its ownership positions in companies to encourage improved performance in and disclosure of environmental, social, and governance factors ” </li></ul></ul><ul><ul><li>Example of “engagement activity”: Burma. In discussion with Senior Execs at Ivanhoe mines </li></ul></ul>
  22. 23. Both CPPIB and OTPP <ul><li>Investment belief: Artificial constraints decrease returns and/or increase risk over time </li></ul><ul><li>Hence, they do not screen stocks based on non-financial criteria alone </li></ul><ul><li>Believe that engagement is a more effective approach </li></ul>
  23. 24. Global perspective on size <ul><li>Largest funds in Canada </li></ul><ul><ul><li>CPPIB </li></ul></ul><ul><ul><li>September 30, 2008: CDN $117 billion </li></ul></ul><ul><ul><li>Caisse de depot et placement du Quebec $120 billion (net) </li></ul></ul><ul><li>Largest in North America </li></ul><ul><ul><li>CALPERS: </li></ul></ul><ul><ul><li>November 30, 2008: US$180.9 billion </li></ul></ul><ul><li>Largest in the world </li></ul><ul><ul><li>Japan Government Pension Investment Fund </li></ul></ul><ul><ul><li>September 2008: US$1.3 trillion </li></ul></ul>

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