Final Mutual Fund

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  • Offshore funds Collective Investment funds registered in tax havens such as small Caribbean islands Asia pacific Luxembourg, Jersey & Dublin Typically less regulated than onshore funds Fewer investment restrictions More sophisticated investors Onshore fund locations: USA UK Hong Kong Singapore Luxembourg has both
  • Final Mutual Fund

    1. 1. Welcome to Introduction to Fund Training
    2. 2. <ul><li>Definition </li></ul><ul><li>“ An entity that pools shareholders’ money to provide professional investment management . </li></ul><ul><li>Typically a fund sells its shares to the public, invests the proceeds-mostly in securities-to achieve its investment objectives , and distributes to its shareholders the net income and net gains realised on the sale of its investments.” </li></ul><ul><li> </li></ul>What is a Fund?
    3. 3. Characteristics <ul><li>Open ended i.e. create or cancel shares according to demand. </li></ul><ul><li>Offshore v onshore investing </li></ul><ul><li>Investors buy/sell directly from the fund rather than on a market </li></ul><ul><li>The price paid for mutual funds is the NAV per share ( ± fees/commissions) </li></ul><ul><li>Investment portfolios are managed separately by an Investment Manager. </li></ul><ul><li>The rules of risk v. return still apply to mutual funds. </li></ul><ul><li>Funds are often divided into classes </li></ul>
    4. 4. How does a fund make money? <ul><li>Income </li></ul><ul><ul><li>Interest from bond/money market funds </li></ul></ul><ul><ul><li>Dividends from equity funds </li></ul></ul><ul><li>Capital gains </li></ul><ul><ul><li>Realised </li></ul></ul><ul><ul><li>Unrealised </li></ul></ul>
    5. 5. How does a shareholder make money? <ul><li>Income distribution </li></ul><ul><li>Capital gains distribution </li></ul><ul><li>NAV increases above the price the investor bought the shares at and makes a profit from selling them. </li></ul>
    6. 6. The key players in the Fund Industry <ul><li>Investor </li></ul><ul><li>Transfer Agent </li></ul><ul><li>Fund accountant </li></ul><ul><li>Investment Manager/Fund Manager </li></ul><ul><li>Trustee </li></ul><ul><li>Custodian </li></ul>
    7. 7. The Investor <ul><li>Provides the money for the Fund Manager to invest in the Security markets. </li></ul><ul><li>Purchases (Subscriptions) and Sells (Redemptions) shares/units of the fund </li></ul><ul><li>Investors hope the value of the shares/units increase in value and/or the fund returns money in the form of distributions </li></ul><ul><li>Investors deal with the Transfer Agent or a Distributor (An entity that has a contractual relationship with the fund to sell shares on its behalf). </li></ul>
    8. 8. The Transfer Agent <ul><li>Maintenance of the Shareholder register: </li></ul><ul><ul><li>Shareholder dealing </li></ul></ul><ul><ul><li>Settlement of Shareholder deals, and instructing the transfer of monies to both the fund and the shareholders. </li></ul></ul><ul><ul><li>Maintaining Shareholder records (Change of address, change of bank details etc…) </li></ul></ul><ul><ul><li>Calculation and payment of distributions </li></ul></ul><ul><ul><li>Responding the Shareholder/Agent queries </li></ul></ul><ul><ul><li>Issuing and responding to all correspondence in relation to the Fund </li></ul></ul>
    9. 9. The Fund Accountant <ul><li>Valuations Group </li></ul><ul><li>Calculates the funds price i.e. the NAV in accordance with the prospectus </li></ul><ul><li>Ensuring cash & Asset reconciliations are completed </li></ul><ul><li>Central Administration </li></ul><ul><li>Trade processing </li></ul><ul><li>Calculation of net income </li></ul><ul><li>Corporate actions </li></ul><ul><li>Reporting & Expense group </li></ul><ul><li>Calculates fund expenses </li></ul><ul><li>Prepares annual and semi-annual accounts </li></ul><ul><li>Assist Auditors </li></ul>
    10. 10. The Fund Manager <ul><li>Makes decisions on purchase and sale of the underlying assets of the fund </li></ul><ul><li>This function is usually maintained by the Client (e.g. Vanguard) or another 3 rd party. </li></ul><ul><li>The Fund Manager will maintain a close relationship with the Fund Administrator and the Transfer Agent. </li></ul>
    11. 11. The Trustee <ul><li>Acts as a watchdog for shareholders of the fund </li></ul><ul><li>Has a fiduciary responsibility to Shareholders. </li></ul><ul><li>Ensures all administration is carried out in compliance with the prospectus and legislation: </li></ul><ul><ul><li>For the Transfer Agent </li></ul></ul><ul><ul><li>For Fund administration </li></ul></ul><ul><ul><li>For the Investment Manager </li></ul></ul>
    12. 12. The Custodian <ul><li>Safekeeping of assets of the Fund </li></ul><ul><li>Settlement of portfolio purchases and sells </li></ul><ul><li>Monitor corporate actions and capital change activities </li></ul><ul><li>Identify and collect dividend and interest income </li></ul><ul><li>Pay expenses </li></ul><ul><li>Both the Transfer Agent and Fund Administrator will perform Cash reconciliations with the Custodian </li></ul><ul><li>The Fund Administrator will also perform an Asset/Holdings reconciliation with the Custodian. </li></ul>
    13. 13. <ul><li> </li></ul>Fund TA FA FM Custody/Trustee IBM Google Microsoft Private investors Private companies Institutional investors <ul><li>Capital gains </li></ul><ul><li>Income (Dividends + Interest) </li></ul>Distributions to shareholders Reinvestment
    14. 14. Fund Valuation <ul><li>The price of a fund is the NAV ( Net Asset Value) </li></ul><ul><li>In order to identify how much the Investor should pay for their units in a fund, or indeed how much they should receive if they decide to sell their investment, the value of the fund needs to be determined. </li></ul><ul><ul><li>Calculated by : </li></ul></ul><ul><ul><ul><li>Valuing assets at Market Value </li></ul></ul></ul><ul><ul><ul><li>Calculating and deducting liabilities </li></ul></ul></ul><ul><ul><li>Shares outstanding is the # of shares in issue </li></ul></ul>
    15. 15. Fund Valuation <ul><li>The market value of a security is </li></ul><ul><ul><li>Shares x Price = Market value </li></ul></ul><ul><li>The price that a shareholder in a fund will receive is the NAV. i.e. </li></ul><ul><ul><li>Shares x NAV = Market value </li></ul></ul><ul><li>The NAV is provided to the TA dept. by the valuations team in order to notify Shareholders of the value of their investment. </li></ul><ul><li>Takes into account unrealised & realised G/L </li></ul>
    16. 16. <ul><ul><li>Assets – Liabilities </li></ul></ul><ul><ul><li>(Shareholder Equity) </li></ul></ul><ul><ul><li>Shares outstanding </li></ul></ul><ul><ul><li>(no. of shares in issue) </li></ul></ul>NAV Calculation:
    17. 17. Net Asset Value <ul><li>Assets </li></ul><ul><li>Portfolio of securities </li></ul><ul><li>Cash </li></ul><ul><li>Receivables </li></ul><ul><ul><li>Income (Dividends & Interest) </li></ul></ul><ul><ul><li>Subscriptions </li></ul></ul><ul><ul><li>Securities sold </li></ul></ul><ul><li>Liabilities </li></ul><ul><li>Expenses </li></ul><ul><li>Payables </li></ul><ul><ul><li>E.g. Redemptions </li></ul></ul><ul><ul><li>Securities bought </li></ul></ul>
    18. 18. Fund Valuations - Key Steps <ul><li>The following components make up the NAV. </li></ul><ul><li>We will look at each in turn: </li></ul><ul><li>Shareholder activity </li></ul><ul><li>Trade Processing & pricing </li></ul><ul><li>Corporate Actions </li></ul><ul><li>Income Accrual </li></ul><ul><li>Expense Accrual </li></ul>
    19. 19. Shareholder Capital <ul><li>Notification of subscriptions into the fund and redemptions out of the fund are provided to Fund Accounting by the Transfer Agent. </li></ul><ul><li>Fund accounting provides TA with the NAV for each fund on a daily basis. The principal amount of each subscription and redemption will be calculated using this NAV. </li></ul>
    20. 20. Subscriptions <ul><li>As are funds are open ended , subscriptions into the fund will result in more units being created. </li></ul><ul><li>The subscriber will either be an existing share holder or a new investor. </li></ul><ul><li>The effect on the fund is as follows: </li></ul><ul><ul><li>The number of units will be increased, the receivables figure on the balance sheet will also increase. </li></ul></ul><ul><li>Example </li></ul><ul><li>Based on a prior NAV of $10.30 an investor wishes to subscribe for 100 units. </li></ul><ul><ul><li>Units x NAV= Value </li></ul></ul><ul><ul><li>100 x 10.30 = $1030 </li></ul></ul><ul><ul><li>The units in the fund will increase by 100 and the receivables figure will increase by $1030 </li></ul></ul><ul><ul><li>This therefore impacts the top and bottom part of the NAV equation. </li></ul></ul>
    21. 21. Redemptions <ul><li>Redemptions from the fund will result in a decrease in the total number of units held in the fund. </li></ul><ul><li>Redemptions can only be made by existing shareholders. </li></ul><ul><li>The effect on the fund is as follows: </li></ul><ul><ul><li>A decrease in the number of units outstanding </li></ul></ul><ul><ul><li>An increase in the payables figure </li></ul></ul><ul><li>Example </li></ul><ul><li>Based on a prior NAV of $10.30 the shareholder wishes to redeem 100 units </li></ul><ul><ul><li>Units x NAV = Value </li></ul></ul><ul><ul><li>100 x 10.30 = $1030 </li></ul></ul><ul><ul><li>The units in the fund will be reduced by 100 and the payables figure will increased by $1030 </li></ul></ul>
    22. 22. Trades <ul><li>Trades are the buying and selling of securities on the securities markets. </li></ul><ul><li>Trades are received from Fund Managers on a daily basis via the following means: </li></ul><ul><li>Fax - From Fund Manager. </li></ul><ul><li>Swift - Direct from Fund Manager </li></ul><ul><li>Electronically via Trade Interface (IM) </li></ul>
    23. 23. Corporate Actions <ul><li>A corporate action is any action that alters the physical and/or financial state of the security. </li></ul><ul><ul><li>Change in physical state e.g. Spin-off </li></ul></ul><ul><ul><li>Change in financial sate e.g. Dividend </li></ul></ul><ul><ul><li>Change in both e.g. Merger for cash/stock </li></ul></ul><ul><li>Voluntary v. Involuntary corporate actions </li></ul><ul><ul><li>A non-voluntary corporate action is when the shareholders don’t have a say e.g. a stock split </li></ul></ul>
    24. 24. Aim of Corporate Actions <ul><li>To Raise Funds for Investment </li></ul><ul><li>To Alter existing Capital Structure (debt v. equity) </li></ul><ul><li>To Increase share capital </li></ul><ul><li>To enable cost reduction diversification </li></ul>
    25. 25. Corporate Action Examples <ul><li>Stock Splits / Reverse Stock Splits </li></ul><ul><li>Bonus Issues </li></ul><ul><li>Mergers/Acquisitions </li></ul><ul><li>Rights Issues </li></ul><ul><li>Spin Offs </li></ul>
    26. 26. Income <ul><li>All funds generate income and incur expenses in the course of their operations. </li></ul><ul><li>Income and expenses are accrued. i.e. they are accounted for as they are incurred, not as money received or paid. This is known as the accrual concept and prevents large fluctuations in the NAV. </li></ul>
    27. 27. Income <ul><li>Income is paid on the majority of investments and can be received in different forms. The most common forms include: </li></ul><ul><li>Equity Funds - All equity funds earn their income from dividends and also generate income through bank interest. </li></ul><ul><li>Bond Funds - Interest bearing or income bearing securities. </li></ul><ul><li>Money Market - Cash / short term securities. </li></ul>
    28. 28. Dividends <ul><li>A dividend is the payment to shareholders from a company in return for investing in that company. They are usually paid every year but the frequency of payment varies. </li></ul><ul><li>Dividend Stock Options - Companies may also give the shareholder the option to choose between a cash dividend or the receipt of the equivalent in stock. </li></ul><ul><li>Dividends are almost always taxed when payment is made, especially if to overseas shareholders. This tax is known as withholding tax and each country will have different rates. </li></ul>
    29. 29. Example - <ul><li>A foreign shareholder has 1000 IBM shares. A Gross dividend of $0.75 per share is declared. Withholding tax is 30%. </li></ul><ul><li>Gross Dividend = 1,000 * $0.75 = $750.00 </li></ul><ul><li>Tax = $225.00 </li></ul><ul><li>Net Dividend = $750 - $225 = $525.00 </li></ul>
    30. 30. Bond Income <ul><li>EXAMPLE : </li></ul><ul><li>A Fund has a holding of 2,500,000 in Allstate Life Bond 08/08/05. It’s coupon rate is 2.02%. The last payment date was 08/02/05. The next payment is 08/05/05. How much will the fund receive on 08/05/05 ? </li></ul><ul><li>Holding 2,500,000 </li></ul><ul><li>Coupon rate 2.02% </li></ul><ul><li>Income for year = 50,500 </li></ul><ul><li>Daily Income = 140.28 (50,500/360) </li></ul><ul><li>For 89 days = 12,484.72 (140.28 *89) </li></ul>
    31. 31. <ul><li>Each fund incurs expenses due to paying for various services </li></ul><ul><ul><li>Fund accounting </li></ul></ul><ul><ul><li>Transfer agency </li></ul></ul><ul><ul><li>Custody </li></ul></ul><ul><ul><li>Legal </li></ul></ul><ul><ul><li>Audit etc… </li></ul></ul><ul><li>We accrue expenses on a daily basis so that when the expense is due, we have it ‘put aside’ ready for payment. </li></ul>Expenses
    32. 32. <ul><li>Expenses are accrued to mitigate a material impact to the NAV on a given day, and thus adversely affect shareholders. </li></ul><ul><li>Therefore, by accruing expenses daily, we have a regular impact to the fund rather than the NAV fluctuating wildly due to expenses. </li></ul><ul><li>Expenses can be fixed or variable. </li></ul>Expenses
    33. 33. What are basis points? <ul><li>It is essential to gauge the movement of the yield of a Fund on a daily basis. </li></ul><ul><li>To do this we use the term Basis Point movement to measure the daily movement of the yield. </li></ul><ul><li>A Basis point is 0.01% of the total net assets. </li></ul><ul><li>If the Yield has moved from 4.02% to 4.04% it is said to have moved up 2 basis points. </li></ul><ul><li>10 basis points of €50,000,000 is 50,000,000 x 0.1% = €50,000 = NAV error </li></ul>
    34. 34. Calculating expenses <ul><li>Fixed expenses </li></ul><ul><ul><li>Audit </li></ul></ul><ul><ul><li>Legal </li></ul></ul><ul><ul><li>Printing </li></ul></ul><ul><ul><li>Filing & Registration </li></ul></ul><ul><li>E.g. </li></ul><ul><li>€ 30,000 per year </li></ul><ul><li>€ 30,000/365 </li></ul><ul><li>= €82.19 daily impact </li></ul><ul><li>Variable expenses </li></ul><ul><ul><li>Fund accounting </li></ul></ul><ul><ul><li>Transfer agency </li></ul></ul><ul><ul><li>Custody </li></ul></ul><ul><li>E.g. </li></ul><ul><li>F.A. fee of 10bps of TNA </li></ul><ul><li>If TNA are €23,154,486 </li></ul><ul><li>€ 23,154,486 x 0.1% </li></ul><ul><li>= €23,154.49/365 </li></ul><ul><li>= €63.44 daily mpact </li></ul>
    35. 35. Which Of These Components Do You Think Has The Most Influence On The Movement Of The NAV? <ul><li>FX rates </li></ul><ul><li>Security pricing </li></ul><ul><li>Corporate Actions </li></ul><ul><li>Capstock </li></ul><ul><li>Income </li></ul><ul><li>Expenses </li></ul>Question
    36. 36. Importance of an Accurate NAV <ul><li>Errors cause an administrative burden on TA and FA </li></ul><ul><li>Errors cause money loss to Shareholders </li></ul><ul><li>Remaining Shareholders penalised </li></ul><ul><li>Administrator to compensate fund/shareholder </li></ul><ul><li>Reputation Risk </li></ul><ul><li>Regulatory Inspection </li></ul><ul><li>Qualified Trustee/Audit Report </li></ul>

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