Module 9 - Equities Funds Management & Superannuation PDF

Module 9 - Equities Funds Management & Superannuation Introduction Fund managers provide collective investment services to surplus units by attracting funds form investors and by professionally managing their investments. - Contributes to flow of funds through direct financing - Provides range of...

Module 9 - Equities Funds Management & Superannuation Introduction Fund managers provide collective investment services to surplus units by attracting funds form investors and by professionally managing their investments. - Contributes to flow of funds through direct financing - Provides range of investment opportunities Fund manager pools all investor funds together to buy larger securities on exchanges - Helps diversify all portfolios of investors The funds belong to the retail investors, who receive investment returns less fees paid to fund manager - Investment risk remains with the contributor. Fund management companies e.g. Perpetual Asset Classes Main Asset Classes; Categories of investment instruments. 1) Equities: 2) Property 3) Alternative investments e.g. art, commodities (gold, diamonds, minerals), collectables, crypto (traditionally doesn’t trade on exchanges) 4) International Assets e.g. international equity, bills, property etc. 5) Interest Earning Securities; Bonds, NCDs, BAs 6) Cash and Deposits Balanced portfolio = Portfolio with investments across asset classes Assets with greater levels of risk and return e.g. shares property are known as growth assets - A growth portfolio is weighted towards high risk/return asset classes. - Gorwth assets are more volatile, means they are subject to market conditions - Potential for long term capital appreciation and higher returns Low risk/return assets e.g. cash and interest earning securities are called defensive assets - A defensive portfolio holds a combination (e.g. 60:40) of growth & defensive. - More stable - Less likely to experience large losses during market conditions Growth & defensive assets in each category. Part A. Superannuation Funds Superannuation is a compulsory form of long term savings. Employers make contributions on behalf of employees Purpose to establish pool of assets that provide the contributor with income in retirement, reduces reliance of retirees on government pensions - Compulsory since 1992 - Min contribution of income is 11% - Subject to concessional tax rate Prior to retirement, your wealth consists mainly of human capital - A lot of TVM As time to retirement decreases, your financial capital (superannuation savings), increases Financial capital doesn’t decrease immediately after retirement as people don’t withdraw huge amounts initially and savings/interest accumulates The Form ad Structure of Superannuation Schemes Main schemes: 1) Accumulation Schemes: Produces lump sum that depends on size of contributions and the rate of earnings on their investments - Investment and survivorship risk is borne by contributors - Switches to a fund that accumulates money to an annuity payout that pays out consistently over retirement period 2) Defined Benefit Schemes: Commit to pay specified benefit (either lump sum or pension) to retiree - For government workers, don’t have individual account, there is a joint one and duration of work and level, determines payout received. Trustees Superannuation have a trust as a component of the fund Trustees ensures scheme is managed in the interests of it’s members and that funds are allocated according to the trust deed with regard to risks involved and the need for liquidity Trustees: - Have a fiduciary duty of care to the scheme’s members to reduce fraud, theft etc. - Do not guarantee returns - Are supervised by APRA Heavily overseen by APRA Trust workers with trustees who manage the trust, ensuring diversification, risk profile. Trustees get portfolio managers to manage these funds Trustees set fees and charges for the fund and manages payment of benefit to members once retired · The Allocation of Investment of Superannuation Schemes Most superfunds invest in international and Australian shares Investing in international shares, helps diversify away from unique Australian risk Bonds, international fixed interest (Bonds, NCDs, BABs), cash, infrastructure, property Listed property: Real estate investment trusts Unlisted property: private property Hedge funds The Superannuation Industry The industry comprises: 1) Not for Profit schemes established by: - employers, categorised as corporate or public service schemes - Trade unions, categorised as industry schemes - Industry superfund is for people working in that industry - Public sector is government 2) For profit schemes established by professional managers - Known as retail schemes - Retail is private companies 3) There are also many self managed funds (SMF) Self Managed Superfund SMFs are trust with up to four members, all of whom must be trustees of the fund Assets in the fund are managed by it’s members for the sole purpose of providing retirement income Most operate under rules set by ATO Reasons for SMFs: - Choose custom investments - Minimise tax - Customise riskiness of investments Collective Investment Schemes These are investment vehicles that enable the ownership of a small portion of large portfolios of securities (or other assets) Hedge funds, public unit trusts, ETFs and private equity funds Provides access to wholesale financial markets Money is pooled together to buy securities of larger value Benefits: - Access to wholesale investments: such as commercial property - Economies of scale that lower transaction costs: such as research and trading commissions - Diversified investments: that lower risk for an expected rate of return - Investment expertise Cost of investing for pooling money is reduced means lower transaction costs for investment manager Lower research cost as collectively, investment manager will do it for one lot of pooled funds for multiple investors. Retail investor is able to gain access to well diversified portfolio to maximise return for given level of risk not otherwise accessed on easily accessed mkt. 1) Public Unit Trusts ASIC regulated collective investment schemes that raise funds by selling units to the public, which represent a share of their assets. A public unit trust raises fund by selling units where one units equals one share of their asset to investors. Pooled funds are allocated by the trust’s investment manager to assets specified by the trust deed, subject to a trustee’s oversight Mainly invest in share portfolios and commercial real estate to generate a return for investors - Fund managers earn fees (entry/exit ongoing management fees) for management of trust A trustee owns beneficiaries on behalf of the trust Public unit trust have a broad range of assets accessible by investors to diversify portfolios Less popular over time due to ETF 2) Exchange Traded Funds 3) Hedge Funds Pooled investment schemes that use a wide range of complex and non-traditional investment strategies and very high levels of debt Managed by specialist financial managers Mostly US based where managers are very aggressive - High returns High risk - High failure rate but some do achieve high returns - Mostly institutional and high net worth investors Private investment scheme Not listed on ASX Difficult to buy into and add money to pool due to high amount requirement Pool capital from credited investors. Not subject to same regulatory requirements as general investment strategies and not available to general public Mortgage backed securities decrease total management value of hedge funds after GFC in 2007 Hedge Funds Strategies: - Known as Hedge funds as they aim to make profits when share values fell as well as when they increase - Strategies include; a) Short Selling b) A long/short strategy c) Derivatives d) Program and High Frequency trading e) Arbitrage f) The carry trade Managed by professional fund managers who employ these strategies to outperform market to search for ‘alpha: the outperformance of the market’ Hedge funds use leverage of borrowing money to increase their return Leverage compounds the return they get Compound is also compounded through derivatives Hedge funds charge fees based on percentage of assets under management and percentage of performance fees Hedge funds get involved in short selling which is selling assets that are owned in the hope that they can buy them back at a cheaper price. Institall utional H & 544 454 Trag Gr. "Th , Nexu Hedge Funds (Continued) Fees in the form of ongoing management fees and performance linked fees. - 2/20 is common term of fee structure specifying 2 being management fee being 2% charged annually and 20 refers to performance fee which is 20% of the profits a fund generates above a certain level. 20% is known as high water mark Funds of Hedge funds (FOHFs) seek to reduce investor risk by investing in a range of hedge funds but impose an additional set of feeds. - Get fund manager that takes investor money and buy shares in different hedge funds. - Provides investors to broad range of investment strategies and fund managers Leverage and complex investment strategies make them extremely high risk me a 4) Private Equity Funds Investment funds that aim to buy companies, improve their financial performance and resell them at a profit (E.g. Dick Smith) Use a combination of equity supplied by investors in the fund and debt controlling partners Private as they are not companies: Limited partners - Controlling Partners: invest in and run the fund where as - Limited Partners: Supply equity, pay fees to the controlling partners and must be patient because the investments have a medium to long term horizon. Accredited, instituional investors Come in usually prior to IPO and most commonly in start up companies. - Companies looking to expand - Companies undergoing financial difficulty and become target of private equity takeover Provide strategic items to the company, operating expertise, operating resources to generate high returns for investors. Use leverage to buy companies to increase returns but increase risk Usually illiquid for investors Investors required to commit capital for several years and usually a clause that it cannot be withdrawn for certain time period due to amount of work and time needed to transform a company. Charge management fees and typically percentage of Asset Under Management and a percentage of the profit generated carried interest · Part C. The Principles and Approaches of Investment Management Approaches to Investment Management There are two broad approaches to investment management: 1) Active Investment Management - Pursuit of above average returns where portfolios are managed by replacing under performing assets with those that will do better - Team or individual manager make investment decisions on behalf of client to generate a higher return than market or benchmark. - Various investment analysis techniques like fundamental and technical analysis - Will pick assets that strive to outperform market - Higher fees due to higher skills and time spent to actively manage this type of investment scheme over a passive manager - Seek above average returns, above those of competing managers and market - Aim to make superior selection and timing decisions - Ongoing research and frequent trading, compensated through higher fees 2) Passive Investment Management - Practice of maintaining portfolios so that their performance closely matches that of a benchmark index. - Investing in a portfolio that tracks a benchmark - Passive manager invests in a diversified portfolio of assets to achieve same return as market - Charge lower fees than active managers to reflect lower level of analysis and research Active managers have been more popular but after COVID, this changed to passive as people realised it doesn’t necessarily generate much superior return due to the high number of fees and increased risk. Fundamental Analysis: select asset based on present value of expected future payments - This PV is compared to current price, overpriced sold, underprice bought or retained - Includes market & industry analysis, financial statement analysis, discounted cash flow analysis Technical Analysis: Uses historical data to predict future asset price movements and so reveal when to buy & sell - Analysts look for persistent trends and cyclical price patterns by considering: - Price channels, price support, resistance lines and momentum indicators - Evidence of consistent, above average returns is not strong but still widely used (SENTIMENT STRATEGIES) - Momentum investors believe price take time to move to their new fair values following the release of new information - Buy when price began to rise, expecting continuing rise and vice versa - Contrarian Investors believe market overreact to good and bad news - Buy when prices fall (believing price have fallen too much) and vice versa Part D. Investment Management Performance Returns need to be considered with reference to the risks taken Comparisons made between managers in same asset class Funds returns are unstable, and past returns are not usually a good indicator of future returns. Measure both return and risk The Performance of Active Vs Passive Investment The EMH is correct, active managers should not be able to consistently earn excess returns for investors, especially after fees - Studies show passive funds have achieved higher returns after fees than actively managed funds - Sometimes an active manager can outperform for a number of years, or within a particular area. Ratings of Investment Managers Rating agencies S&P & Morningstar, rate managers on their quantitative risk and return history and a qualitative assessment of the manager’s skill. - Use 5 star rating scale - Compared to other managers within same category e.g. growth managers, balanced managers, defensive managers Ratings influence allocation of investment between active managers Research indicates that higher rated managers can continue to outperform but not consistently. DEFAULT SUPERNNNUATION Workshop - Notes = DEFAU MY super product Part A. Superannuation Funds Superannuation - Financial maths - Use compound interest formula for value of single sum - For future value of ordinary annuity, use future or present value annuity formula 1 Impact of Compounding - Superannuation returns compound because they cannot be withdrawn. 2 Impact of Earnings - Impact of compounding is greater with a higher rate of earnings - Compare the accumulated sum from contributions of $200 per month for 40 years with average returns of: o I 9) r = 6 r : = / : $10 o -$1 , 29, 5 Investment into infrastructure assets e.g.roads, electricity, airports These assets are considered to be relatively secure, stable and produce relatively regular cash flows. Part B. Collective Investment Schemes Exchange Traded Funds ETFs are listed, pooled investments in assets (mostly shares0 that have been selected to achieve returns that closely match those of a benchmark index. Typically designed to track the performance of a certain stock market index. ETFs issue units to fund their portfolios, which are listed - Risk metrics of Beta shares ETF in the ASX 200 has the same market risk as the ASX200 as it is mirroring the eprformance of the index. They have low fees, provide investors with a passively managed diversified portfolio and their value tracks the movements in the index Some ETFs invest in other assets such as bonds, FX, commodities and precious metals Pooled investments/managed funds is a basket of shares Low-cost way to invest therefore fewer broker commissions than if purchasing stocks individually Buy and sell ETFs on ASX through brokers ETFs are majority passive investments Characteristics of ETFs: - Created by issuer & traded on ASX - When ETFs are created, the underlying securities are transferred to a custodian, who is responsible for holding them - Net Asset Value (NAV): Market value of underlying portfolio (adjusted for fees and expenses) less any liabilities - Price at or close to NAV - Expressed on a per unit basis. - NAV = $ net value of fund’s assets (less liabilities)/fees / # of units on issue. - Usually very close to current trade prices. ETFs just track and are therefore passive where as managed ETFs active investing, actively search for undervalued companies. Risk levels; Passive fund -> managed fund -> hedge fund  Advantage of ETF: - Portfolio of diversification to eliminate systematic risk - Low minimum investment requirements - Low trading cost & fees - International investment - High transparency: holding disclosed daily - High liquidity Part C. Principles and Approaches of Investment Management Active Vs Passive Investing Active Management - Forecasting markets/identifying underpriced/overpriced securities to achieve higher returns - Technical (analysis of markets, formula discovery)/fundamental (financials, market expectations, brief or standard level) analysis - Create alpha opportunities (alpha refers to excess return above the CAPM measure) (alpha is the difference between a found high share return rate and the capm return rate e.g. share found 17% return and capm return is 14%, alpha would be 3%) - Market timing - Fund managers use their skills to deliver higher expected return - Uses EMH to identify weak form efficient markets. Passive Management - Choosing capital allocation between cash and the risky portfolio and choosing the asset allocation within the risky portfolio. - Buy and hold to a benchmark - Diversified portfolio with no security mispricing identification Part D. Investment Management Performance Does outperformance persist? - A reasonable