How financisl accounting

1. PROFESSIONAL ASSET
MANAGEMENT
Presented by
Dr. Suresh Vadde
Mekelle University, Ethiopia

2. Contents
• Asset Management
• The Asset Management Industry: Structure And Evolution
– Private Management And Advisory Firms
– Investment Fund Companies
• Services of Investment Companies
• Management of Investment Companies
• Valuing Investment Company Shares
• Types of Investment Companies
– Closed-end Investment Company
– Open-end Investment Company
• Mutual Fund Costs
• Types of Investment Companies Based on Portfolio Objectives
• Global Investment Companies
• Ethics and Regulation in the Professional Asset Management
Industry
• The Code of Ethics and Standards of Professional Conduct

3. Asset Management
• The management of a client's investments by a
financial services company.
• Asset management is a process whereby a business
manages assets as a way of maximizing financial
return.
• An asset management firm that invests the pooled
funds of retail investors in securities in line with the
stated investment objectives.
• For a fee, the investment company provides more
diversification, liquidity, and professional management
consulting service than is normally available to
individual investors.

4. • At the end of 2009, the value of assets
professionally managed in the world totaled €36.5
trillion.
• Out of which €12.4 trillion was managed in
Europe, €3.8 trillion in the UK, €2.8 trillion in
France, and €1.5 trillion in Germany.
• In relation to aggregate European GDP, total
assets under management reached 97% at the
end of 2009.
• These figures highlight the essential role taken by
asset management in the investment of society’s
long-term savings.

5. Rank Asset Management Company Country
Assets under
management
(US$bn)
1 Black Rock Inc. US $3,560
2 UBS Switzerland $2,280
3 Allianz Group Germany $2,213
4 Vanguard Group Inc. US $2,080
5
State Street Global Advisors
(SSGA)
US $1,908
6
PIMCO (Pacific Investment
Management Company)
US $1,820
7 Fidelity Investments US $1,576
8 Deutsche Bank Germany $1,433
9 AXA Group France $1,393
10 J.P. Morgan Asset Management US $1,347
Top 10 Asset Management Companies as of June 30, 2012

6. The Asset Management Industry:
Structure and Evolution
• There are two ways in which
professional asset management firms
are organized.
– Private Management and Advisory Firms
– Investment Fund Companies

7. I-Private Management and Advisory Firms
• These services can range from providing
standard banking transactions (savings
accounts, personal loans).
• Advising clients on structuring their own
portfolios to managing the investment funds.
• Relationship with client.
• Each client of the management firm has a
separate account.
• Assets under management (AUM)

8. II-Investment Fund Companies
• An investment company is a trust,
corporation or partnership that primarily
invests the funds pooled from the
shareholders in the financial securities such
as stocks and bonds.
• The investment companies are those, which
hold financial securities of the other
companies.
• The total market value of all investments
divided by the number of fund shares
outstanding is the net asset value (NAV).
• Portfolio management is handled by an
investment management company.

10. Flow of Funds in the Financial System

11. Services of Investment Companies
• Administration & record keeping
• Diversification & divisibility
• Professional management
• Reduced transaction costs

12. MANAGEMENT OF INVESTMENT COMPANIES
• The management of the portfolio of securities and most of
the other administrative duties are handled by a separate
investment management company hired by the board of
directors of the investment company.
• Subsequently, this board of directors hires the investment
advisory firm as the fund’s portfolio manager.
• The contract between the investment company (the
portfolio of securities) and the investment management
company indicates the duties and compensation of the
management company.
• The major duties of the investment management company
includes
– Investment research,
– The management of the portfolio,
– Administrative duties, such as issuing securities and
handling redemptions and dividends.

13. VALUING INVESTMENT COMPANY SHARES
• NAV is used as a basis for valuation of investment
company shares.
• Net asset value (NAV) represents a fund's per
share market value.
• This is the price at which investors buy ("bid
price") fund shares from a fund company and sell
them ("redemption price") to a fund company.
• NAV computation is undertaken once at the end
of each trading day based on the closing market
prices of the portfolio's securities.

14. • NAV =
• (Market Value of All Securities Held by Fund + Cash and
Equivalent Holdings - Fund Liabilities) / Total Fund Shares
Outstanding
• Example:-
• At the close of trading yesterday that a particular mutual fund held
$10,500,000 worth of securities, $2,000,000 of cash, and $500,000 of
liabilities. If the fund had 1,000,000 shares outstanding, then
yesterday's NAV would be:
• NAV = ($10,500,000 + $2,000,000 - $500,000) / 1,000,000 = $12.00
• A fund's NAV will change daily as the value of a fund's securities,
cash held, liabilities, and the number of shares outstanding fluctuate.
• Net asset values are like stock prices in that they measure the value
of one share of a fund.
• Also, they give investors a way to compare a fund's performance with
market or industry benchmarks (such as the Standard & Poor's 500 or
an industry index).
•

15. TYPES OF INVESTMENT COMPANIES
 There are two types of investment
companies:
 Closed-end Investment Company
 Open-end Investment Company

16. Closed-end Investment Company
• Closed-end investment company do not continuously offer their shares
to the public for sale.
• Rather, they sell a fixed number of shares at one time (in an initial
public offering), after which the shares typically trade on a secondary
market.
• The market value of the shares will be based upon supply and
demand, much like other securities and not by net asset value.
• The investment portfolios are managed by separate entities known as
"investment advisers" that are registered with the Securities Exchange
Board.
• The funds usually invest in hundreds of companies, so they offer good
diversification in certain areas.
• There is no minimum number of shares to buy, and selling the funds is
very easy and quick.
• When purchasing a closed-end fund, you are typically charged the
usual brokerage commission as well as an annual management fee,
usually under 1%.

17. Open-end Investment Company
• A mutual fund is a company that pools money from its
investors and then invests the money in stocks, bonds, money
markets or other types of securities that are outlined in the
company's prospectus.
• Investors can buy or redeem (sell) shares directly through the
investment company.
• The price of a share in an open-end fund will fluctuate daily,
depending upon the performance of the securities held by the
fund.
• Benefits of open-end funds include diversification and
professional money management.
• Open-end funds are more flexible and liquid, many funds
allow the transfer or exchange among fund families without

18. MUTUAL FUND COSTS
• Load versus no-load:
• Load funds have a sales force and the shareholders have to pay a
sales charge. Load funds charge sales commission up to 8.5% of
NAV.
• There are a couple different types of load funds out there.
– Back-end loads mean the fee is charged when you sale the
mutual fund.
– Front-end loads mean the fee is charged when you purchase the
mutual fund.
• A no-load fund simply means that you can buy and redeem the
mutual fund units/shares at any time without a commission or sales
charge.
However, some companies such as banks and broker-dealers
may charge their own fees for the sale and redemption of third-party
mutual funds.
• In addition, practically all load funds charge annual distribution fees,
also referred to as 12b-1 fees, which are used to pay advertising,

19. Types of Investment Companies
Based on Portfolio Objectives
Common
stock funds
Balanced
funds
Taxable
bond funds
Money
market funds

20. I- Common stock funds
• A mutual fund that invests in the common stock of
numerous publicly traded companies.
• Common stock funds provide investment diversification
and offer time savings over researching, buying and
selling individual stocks.
• Within common stock funds, wide differences are found
in emphasis, including funds that focus on growth
companies, small-cap stocks, companies in specific
industries or even geographic areas etc.
• A common stock fund may be high-risk if it invests
primarily in start-ups and recent IPOs, or it may be low-
risk if it invests in established companies with stable
returns.

21. II- Balanced funds (Hybrid Funds)
• A balanced fund is geared toward investors who
are looking for a mixture of safety, income and modest
capital appreciation.
• The purpose of balanced funds (also sometimes called
hybrid funds) is to provide investors with a single mutual
fund that combines both growth and income objectives,
by investing in both stocks (for growth) and bonds (for
income).
• Such diversified holdings ensure that these funds will
manage downturns in the stock market without too much
of a loss;
• Flexible portfolio (or asset allocation) funds seek high
total returns by investing in a mix of stocks, bonds, and

22. III- Bond Funds
• Bond funds concentrate on various types of bonds to
generate high current income with minimal risk.
• They are similar to common stock funds; however, their
investment policies differ.
• Some funds concentrate on U.S. government or high-
grade corporate bonds, others hold a mixture of
investment-grade bonds, and some concentrate on high-
yield (junk) bonds.
• Municipal Bond Funds provide investors with monthly
interest payments that are exempt from federal income
taxes.
• To avoid the state tax, some municipal bond funds
concentrate on bonds from specific states, such as the
New York Municipal Bond Fund, which allows New York

23. IV- Money Market Funds
• Money market funds were initiated during 1973 when
short-term interest rates were at record levels.
• These funds attempt to provide current income, safety of
principal, and liquidity by investing in diversified
portfolios of short-term securities, such as Treasury bills,
banker certificates of deposit, bank acceptances, and
commercial paper.
• They typically are no-load funds and impose no penalty
for early withdrawal.
• Also, they generally allow holders to write checks against
their account.

24. The United States has the World’s Largest Mutual Fund Market
Percentage of total net assets, year-end 2011
Sources: Investment Company Institute, European Fund and Asset Management Association, and
other national mutual fund associations

25. GLOBAL INVESTMENT COMPANIES
• Global diversification of investment portfolio include either
international funds or global funds.
• International funds:
• It includes only non-U.S. stocks from such countries as
Germany, Japan, Singapore, and Korea.
• Funds that invest in non-U.S. securities are generally called as
foreign funds.
• Global funds:
• It contains both U.S. and non-U-S. securities. Ideally, a global
fund should invest in a large number of countries.
Both international and global funds fall into familiar
categories: Money funds, long-term government and corporate
bond funds, and equity funds.
In turn, an international equity fund might limit its focus to a
segment of the non-U.S. market, such as the European Fund
or Pacific Basin Fund, or to a single country, such as Germany,
Italy, Japan, or Korea.

26. Ethics and Regulation in the Professional Asset
Management Industry
• A primary intention of the regulations is to guarantee
that investment companies keep accurate and
detailed transaction records and that account
information is reported to investors in a fair and
timely manner.
• Because…
• Investor is hired to perform a service.
• Asset management industry is based on handling
someone else’s money.
• It is heavily regulated to ensure a minimum level of
acceptable practice.

27. Following are the Principal Securities Laws for the Asset
management industry and their primary target user:
• Securities Act of 1933 for security issuers.
• Securities Exchange Act of 1934 for security brokers.
• Investment Company Act of 1940 for mutual funds.
• Investment Adviser Act of 1940 for advisors and private
managers.
• Employee Retirement Income Security Act 1974 (ERISA)
for retirement asset managers.
• Pension Protection Act of 2006 for pension fund
sponsors and managers.

28. The Code of Ethics and Standards of Professional
Conduct
• The Association for Investment Management and
Research (AIMR) has developed for its worldwide
membership of security analysts and money managers a
rigorous Code of Ethics and Standards of Professional
Conduct based on these following principles.
– Act with integrity, competence, dignity, and in an ethical
manner when dealing with the public, clients,
prospects, employers, employees, and fellow members.
– Practice and encourage others to practice in a
professional and ethical manner that will reflect credit
on members and their profession.
– Strive to maintain and improve their competence and
the competence of others in the profession.
– Use reasonable care and exercise independent
professional judgment.

29. By
Dr. Suresh Vadde
Dept’ of AcFn
Mekelle University