FIN 18 - FINMARK

T & TH
NAME OF STUDENTS: REODIQUE, ASHLEY KAYE C.
STUDENT NO. 117783

MODULE 6: ASSET MANAGEMENT FIRMS

I. ASSET MANAGEMENT FIRM

A firm that invests pooled funds from clients, putting the capital to work through
different investments including stocks, bonds, real estate, master limited partnerships
(A master limited partnership (MLPs) is a business venture (entrepreneurial
enterprise that's created to make money) that exists in the form of a publicly traded
limited partnership (business organization owned by two or more co-owners whose
shares are regularly traded on an established securities market). They combine the
tax benefits of a private partnership—profits are taxed only when investors
receive distributions—with the liquidity of a publicly traded company.), and more.

Along with high-net-worth individual (HNWI) (somebody with at least $1 million

in liquid financial assets.) portfolios, AMCs manage hedge funds and pension plans,
and to better serve smaller investors, create pooled structures such as mutual funds,
index funds, or exchange-traded funds (ETFs), which they can manage in a single
centralized portfolio.

AMCs are colloquially referred to as money managers or money management firms.

Those that offer public mutual funds or ETFs are also known as investment companies
or mutual fund companies.

● A money manager is a person or financial firm that manages the securities

portfolio of individual or institutional investors.
● Professional money managers do not receive commissions on transactions;
rather, they are paid based on a percentage of assets under management.
 ● A money manager has the fiduciary duty to choose and manage investments in a
way that puts clients' interests first, last, and always.

General Characteristics of Asset Management Firms

● Asset management refers to the process of developing, operating, maintaining,
and selling assets (resources owned or controlled by a business or an
economic entity that will provide a future benefit.) in a cost-effective manner.
Examples of Assets: Common types of assets include current, non-current,
physical, intangible, operating, and non-operating.
● Most commonly used in finance, the term is used in reference to individuals or
firms that manage assets on behalf of individuals or other entities.
Every company needs to keep track of its assets. That way, its
stakeholders (has an interest in an organization example: employees,
customers, shareholders, suppliers, communities, and governments)will
know which assets are available to be employed to provide optimal returns.
The assets owned by any business fall into two main categories: fixed and
current assets. Fixed or non-current assets refer to assets acquired for
long-term use, while current assets are those that can be converted into
cash within a short amount of time.
● AMC managers are compensated via fees, usually a percentage of a client's
assets under management.
● The fiduciary standard of care requires that a financial adviser act solely in
the client's best interest when offering personalized financial advice

AMC Fees
In most cases, AMCs charge a fee that is calculated as a percentage of the client's total
AUM (Assets under management (AUM) is the total market value of the investments
that a person or entity manages on behalf of clients). This asset management fee is
a defined annual percentage that is calculated and paid monthly. For example, if an
AMC charges a 1% annual fee, it would charge $100,000 in annual fees to manage a
portfolio worth $10 million. However, since portfolio values fluctuate on a daily and
monthly basis, the management fee calculated and paid every month will fluctuate
monthly as well.
Continuing with the above example, if the $10 million portfolio increases to $12 million in
the next year, the AMC will stand to make an additional $20,000 in management fees.
Conversely, if the $10 million portfolio declines to $8 million due to a market correction,
the AMC's fee would be reduced by $20,000. Thus, charging fees as a percentage of
AUM serves to align the AMC's interests with that of the client; if the AMC's clients
prosper, so does the AMC, but if the clients' portfolios make losses, the AMC's
revenues will decline as well.

● Most AMCs are held to a fiduciary standard.

the fiduciary standard states that an advisor must put their clients' interest
above their own. They must follow the very best course of action, regardless
of how it affects them personally or their income.

Understanding Asset Management Companies (AMCs)

Because they have a larger pool of resources than the individual investor could
access on their own, AMCs provide investors with more diversification and investing
options. Buying for so many clients allows AMCs to practice economies of scale (occur
when a business benefits from the size of its operation. As a company gets bigger,
it benefits from a number of efficiencies. ), often getting a price discount on their
purchases.

● Diversification is a strategy that mixes a wide variety of investments within a

portfolio.
● Portfolio holdings can be diversified across asset classes and within classes, and
also geographically—by investing in both domestic and foreign markets.
● Diversification limits portfolio risk but can also mitigate performance, at least in
the short term.
 Pooling assets and paying out proportional returns also allows investors to avoid
the minimum investment requirements often required when purchasing securities on
their own, as well as the ability to invest in a larger assortment of securities with a
smaller amount of investment funds.

A minimum investment is the smallest dollar or share quantity that an investor

can purchase when investing in a specific security, fund, or opportunity. A hedge fund,
for example, may require that their clients deposit at least $100,000 with the firm. Or, a
mutual fund may require at least $3,000 to be invested. This is the minimum investment
required for the hedge fund to manage the client's money.

Importance of Asset Management

● Enables a firm to account for all of its assets

● Helps guarantee the accuracy of amortization rates
● Helps identify and manage risks
● Removes ghost assets in the company’s inventory

How do asset management firms differ from others

in the sector?
Financial firms can be crudely split down the middle – those on the ‘buy’ side and those
on the ‘sell’ side. As asset management companies strive to grow a portfolio for their
clients, their primary role is making smart purchasing decisions that will increase the
overall value of their clients’ funds.

This differs greatly to investment banks, brokerages and insurance firms, which focus
on giving access to funds being sold – such as stock purchases, insurance policies and
mergers and acquisitions.

Sell-side vs. buy-side

One of the major differences between investment banking and asset management is
whether they're on the "sell-side" or the "buy-side" of the financial market. Generally,
investment banking is on the sell-side of the financial market, while asset management
is on the buy-side. The sell-side of the financial market involves issuing and selling
securities, while the buy-side focuses on buying securities. Both sides of the financial
market often interact with one another.

Due to the nature of these firms, they tend to work with larger companies, whereas
many asset management firms will work with high-wealth individuals. Clients usually put
their faith in the expertise of asset managers, giving them a carte blanche role in the
decision-making process.

Benefits of Asset Management

● Improving acquisition and use - By keeping tabs on a company’s assets

throughout their life cycle, a firm owner can improve their technique of acquiring
and utilizing assets. A good case in point is Cisco Systems, which was able to
reduce costs by executing PC asset management. When implementing such a
strategy, the company discovered wasteful purchasing practices, which it solved
by developing a better process for buying the equipment needed by workers.
● Improving compliance - Government agencies, non-profit organizations, and
companies are required to provide comprehensive reports on how they acquire,
utilize, and dispose of assets. To ease the reporting process, a majority of them
record their asset information in a central database. In such a way, when they
need to compile the reports at the end of their financial year, they can easily
access all the information they need.

II. MUTUAL FUND

A mutual fund is a type of financial vehicle made up of a pool of money collected
from many investors to invest in securities like stocks, bonds, money market
instruments, and other assets. Mutual funds are operated by professional money
managers (A money manager is a person or financial firm that manages the
securities portfolio of individual or institutional investors. "portfolio manager,"
"asset manager," or "investment manager."), who allocate the fund's assets
and attempt to produce capital gains or income for the fund's investors.

Mutual funds pool money from the investing public and use that money to buy
other securities, usually stocks and bonds. The value of the mutual fund company
depends on the performance of the securities it decides to buy. So, when you buy a unit
or share of a mutual fund, you are buying the performance of its portfolio or, more
precisely, a part of the portfolio's value. Investing in a share of a mutual fund is different
from investing in shares of stock. Unlike stock, mutual fund shares do not give its
holders any voting rights. A share of a mutual fund represents investments in many
different stocks (or other securities) instead of just one holding.

A mutual fund's portfolio is structured and maintained to match the investment

objectives stated in its prospectus.

Mutual funds give small or individual investors access to professionally managed

portfolios of equities, bonds, and other securities. Each shareholder, therefore,
participates proportionally in the gains or losses of the fund. Mutual funds invest in a
vast number of securities, and performance is usually tracked as the change in the total
market cap of the fund—derived by the aggregating performance of the underlying
investments.

How Mutual Funds Work

A mutual fund is both an investment and an actual company. This dual nature may
seem strange, but it is no different from how a share of AAPL is a representation of
Apple Inc. When an investor buys Apple stock, he is buying partial ownership of the
company and its assets. Similarly, a mutual fund investor is buying partial ownership of
the mutual fund company and its assets. The difference is that Apple is in the business
of making innovative devices and tablets, while a mutual fund company is in the
business of making investments.

Investors typically earn a return from a mutual fund in three ways:

Functions of Mutual Fund

● Income is earned from dividends on stocks and interest on bonds held in the
fund's portfolio. A fund pays out nearly all of the income it receives over the year
to fund owners in the form of a distribution. Funds often give investors a choice
either to receive a check for distributions or to reinvest the earnings and get more
shares.
● If the fund sells securities that have increased in price, the fund has a capital
gain. Most funds also pass on these gains to investors in a distribution.
● If fund holdings increase in price but are not sold by the fund manager, the fund's
shares increase in price. You can then sell your mutual fund shares for a profit in
the market.

If a mutual fund is construed as a virtual company, its CEO is the fund manager,
sometimes called its investment adviser. The fund manager is hired by a board of
directors and is legally obligated to work in the best interest of mutual fund
shareholders. Most fund managers are also owners of the fund. There are very few
other employees in a mutual fund company. The investment adviser or fund manager
may employ some analysts to help pick investments or perform market research. A fund
accountant is kept on staff to calculate the fund's NAV, the daily value of the portfolio
that determines if share prices go up or down. Mutual funds need to have a compliance
officer or two, and probably an attorney, to keep up with government regulations.

Types of Mutual Fund

Equity Funds -An equity fund is a mutual fund that invests principally in stocks. It can
be actively or passively (index fund) managed. Equity funds are also known as stock
funds. Stock mutual funds are principally categorized according to company size, the
investment style of the holdings in the portfolio and geography.

Investment style
The investment style of a mutual fund helps set expectations for risk and performance
potential.
Importance: Investment style is also an important aspect used by institutional
managers in marketing and advertising the fund to investors looking for a specific type
of market exposure.

The size of an equity fund is determined by a market capitalization, while the investment
style, reflected in the fund's stock holdings, is also used to categorize equity mutual
funds.
Market capitalization is the dollar value of a company's outstanding shares and is
calculated as the current market price multiplied by the total number of outstanding
shares.
Some specialty equity funds target business sectors, such as health care, commodities
and real estate.

Fixed- income Funds - Fixed-Income securities are debt instruments that pay a fixed
amount of interest—in the form of coupon payments—to investors. The interest
payments are typically made semiannually while the principal invested returns to the
investor at maturity.

Bonds are the most common form of fixed-income securities. A bond is an investment
product that is issued by corporations and governments to raise funds to finance
projects and fund operations. Bonds are mostly comprised of corporate bonds and
government bonds and can have various maturities and face value amounts.

Companies raise capital by issuing fixed-income products to investors.

A coupon or coupon payment is the annual interest rate paid on a bond, expressed as
a percentage of the face value and paid from issue date until maturity. Coupons are
usually referred to in terms of the coupon rate (the sum of coupons paid in a year
divided by the face value of the bond in question).

It is also referred to as the "coupon rate," "coupon percent rate" and "nominal yield."

For example, a $1,000 bond with a coupon of 7% pays $70 a year. Typically these
interest payments will be semiannual, meaning the investor will receive $35 twice a
year.
Index Funds - An index fund is a portfolio of stocks or bonds designed to mimic the
composition and performance of a financial market index.
"Indexing" is a form of passive fund management. Instead of a fund portfolio manager
actively stock picking and market timing—that is, choosing securities to invest in and
strategizing when to buy and sell them—the fund manager builds a portfolio whose
holdings mirror the securities of a particular index.

Stock Pick is when an analyst or investor uses a systematic form of analysis to

conclude that a particular stock will make a good investment and, therefore, should be
added to their portfolio.

Market timing is the act of moving investment money in or out of a financial market—or
switching funds between asset classes—based on predictive methods. If investors can
predict when the market will go up and down, they can make trades to turn that market
move into a profit.

The idea is that by mimicking the profile of the index—the stock market as a whole, or a
broad segment of it—the fund will match its performance as well.

Balanced Funds - A balanced fund is a type of hybrid fund, which is an investment

fund characterized by its diversification among two or more asset classes. The amounts
the fund invests into each asset class usually must remain within a set minimum and
maximum value. Another name for a balanced fund is an asset allocation fund.

A hybrid fund is an investment fund that is characterized by diversification among two

or more asset classes. These funds typically invest in a mix of stocks and bonds. They
may also be known as asset allocation funds.

Hybrid funds offer investors a diversified portfolio. The term hybrid indicates that the
fund strategy includes investment in multiple asset classes.

An asset class is a grouping of investments that exhibit similar characteristics and are
subject to the same laws and regulations. Asset classes are thus made up of
instruments that often behave similarly to one another in the marketplace.

● Equities (e.g., stocks), fixed income (e.g., bonds), cash and cash equivalents,
real estate, commodities, and currencies are common examples of asset
classes.

Money Market Funds - A money market fund is a kind of mutual fund that
invests in highly liquid, near-term instruments. These instruments include
cash, cash equivalent securities, and high-credit-rating, debt-based securities
with a short-term maturity (such as U.S. Treasuries). Money market funds are
intended to offer investors high liquidity with a very low level of risk. Money
market funds are also called money market mutual funds.
Income Funds - Income funds are named for their purpose: to provide current income
on a steady basis. These funds invest primarily in government and high-quality
corporate debt, holding these bonds until maturity in order to provide interest streams.
While fund holdings may appreciate in value, the primary objective of these funds is to
provide steady cash flow to investors. As such, the audience for these funds consists of
conservative investors and retirees. Because they produce regular income, tax-
conscious investors may want to avoid these funds.
International Funds - An international fund (or foreign fund) invests only in assets
located outside your home country. Global funds, meanwhile, can invest anywhere
around the world, including within your home country. It's tough to classify these funds
as either riskier or safer than domestic investments, but they have tended to be more
volatile and have unique country and political risks. On the flip side, they can, as part of
a well-balanced portfolio, actually reduce risk by increasing diversification, since the
returns in foreign countries may be uncorrelated with returns at home. Although the
world's economies are becoming more interrelated, it is still likely that another economy
somewhere is outperforming the economy of your home country.
Exchange Traded Funds - An ETF is a type of fund that holds multiple underlying
assets, rather than only one like a stock does.

Underlying assets are the financial assets upon which a derivative’s price is based.
Options are an example of a derivative. A derivative is a financial instrument with a price
that is based on a different asset.

Because there are multiple assets within an ETF, they can be a popular choice for
diversification ( strategy that mixes a wide variety of investments within a
portfolio). ETFs can thus contain many types of investments, including stocks,
commodities, bonds, or a mixture of investment types.

An ETF can own hundreds or thousands of stocks across various industries, or it could
be isolated to one particular industry or sector. Some funds focus on only U.S. offerings,
while others have a global outlook. For example, banking-focused ETFs would contain
stocks of various banks across the industry.

III. CLOSED-END INVESTMENT

A closed-end fund is a type of mutual fund that issues a fixed number of shares
through a single initial public offering (IPO) to raise capital for its initial investments. Its
shares can then be bought and sold on a stock exchange but no new shares will be
created and no new money will flow into the fund.

● An initial public offering (IPO) refers to the process of offering shares of a private
corporation to the public in a new stock issuance.
● An IPO allows a company to raise capital from public investors.

Closed-end funds and open-end mutual funds have many similarities. Both
make distributions of income and capital gains to their shareholders. Both
charge an annual expense ratio for their services. Moreover, the companies
that offer them must be registered with the Securities and Exchange
Commission (SEC)

● The expense ratio (ER) is a measure of mutual fund operating costs

relative to assets.
● Expense ratios may also come in variations, including gross expense
ratio, net expense ratio, and after reimbursement expense ratio.

What Are the Advantages of a Closed-End Fund?

You have two potential ways to make money with a closed-end fund: You can
enjoy the income or growth that is produced by the fund's investments. And, you
may be able to buy shares of the fund at a discount to its net asset value (NAV).

An open-end mutual fund calculates its NAV as the real current value of the
investments that are owned by the fund. Shares of a closed-end fund trade
throughout the day on a stock exchange, and that market-driven price may differ
from its NAV.
"Net asset value," or "NAV," of an investment company is the company's total assets
minus its total liabilities. For example, if an investment company has securities and
other assets worth $100 million and has liabilities of $10 million, the investment
company's NAV will be $90 million.

In contrast, an open-ended fund, such as most mutual funds and exchange-

traded funds (ETFs), accepts a constant flow of new investment capital. It issues new
shares and buys back its own shares on demand.
Many municipal bond funds and some global investment funds are closed-end
funds.

Differences Between Closed-End Funds and Open-End Funds

Closed-end funds differ from open-ended funds in fundamental ways. As noted, a

closed-end fund raises a prescribed amount of capital in a one-time offering of a fixed
number of shares. Once the shares are sold the offering is "closed."
Pros
● Diversified portfolio
● Professional management
● Transparent pricing
● Potential for higher yields
Cons
● Subject to volatility
● Less liquid than open-end funds
● Available only through brokers
● May get heavily discounted
Examples of Closed-End Funds
The largest type of closed-end fund, as measured by assets under management,
is the municipal bond fund. These large funds invest in the debt obligations of state and
local governments and federal government agencies. Managers of these funds often
seek broad diversification to minimize risk, but also may rely on leverage to maximize
returns.

Managers also build closed-end global, international funds, and emerging

markets funds that mix stocks and fixed-income instruments. (Global funds combine
U.S. and international securities. International funds purchase only non-U.S. securities.
Emerging markets funds focus on fast-growing and volatile foreign sectors and regions.)

One of the largest closed-end funds is the Eaton Vance Tax-Managed Global
Diversified Equity Income Fund (EXG). Founded in 2007, it had a market cap of $3.2
billion as of January 2022. The primary investment objective is to provide current
income and gains, with a secondary objective of capital appreciation.

What Are the Advantages of a Closed-End Fund?

You have two potential ways to make money with a closed-end fund: You can
enjoy the income or growth that is produced by the fund's investments. And, you may be
able to buy shares of the fund at a discount to its net asset value (NAV).

An open-end mutual fund calculates its NAV as the real current value of the
investments that are owned by the fund. Shares of a closed-end fund trade throughout
the day on a stock exchange, and that market-driven price may differ from its NAV.

IV. UNIT TRUST

A unit trust's success depends on the expertise and experience of the company
that manages it. Common types of investments undertaken by unit trusts are properties,
securities, mortgages, and cash equivalents. The term “unit trust” is also used in the
United Kingdom (U.K.) as a mutual fund, which has different properties than mutual
funds in the United States.

● Cash equivalents are the total value of cash on hand that includes items that are
similar to cash; cash and cash equivalents must be current assets.
● Along with stocks and bonds, cash and cash equivalents make up the three main
asset classes in finance.

In unit trust investments, fund managers run the trust for gains and profit. Trustees are
assigned to ensure that the fund manager runs the trust following the fund’s investment
goals and objectives. A trustee is a person or organization that's charged with managing
assets on behalf of a third party. Trustees are often fiduciaries, meaning the interests of
the beneficiaries of the trust must come first and as part of that responsibility, a trustee's
job to safeguard the assets of the trust.

Fund managers

A fund manager is responsible for implementing a fund's investing strategy and

managing its portfolio trading activities. Investors should fully review the investment
style of fund managers before they consider investing in a fund.

Trustees
are trusted to make decisions in the beneficiary's best interests and have a fiduciary
responsibility to the trust beneficiaries.

A fiduciary
is a person or organization that acts on behalf of another person or persons, putting
their clients' interests ahead of their own, with a duty to preserve good faith and trust.

How Unit Trusts Operate

The underlying value of the assets in a unit trust portfolio is directly stated by the
number of units issued multiplied by the price per unit. It is also necessary to subtract
transaction fees, management fees, and any other associated costs. Determining
management goals and limitations depends on the goals and objectives of the
investment of the unit trust.

In unit trust investments, fund managers run the trust for gains and profit.
Trustees are assigned to ensure that the fund manager runs the trust following the
fund’s investment goals and objectives. A trustee is a person or organization that's
charged with managing assets on behalf of a third party. Trustees are often fiduciaries,
meaning the interests of the beneficiaries of the trust must come first and as part of that
responsibility, a trustee's job is to safeguard the assets of the trust.

Owners of unit trusts are called unit-holders, and they hold the rights to the trust’s
assets. Between the fund manager and other important stakeholders are registrars, who
simply act as middlemen or liaison for both parties.

How Unit Trust Make Money?

Unit trusts are open-ended and are divided into units with different prices. An
open-ended fund allows for new contributions and withdrawals to and from the pool.
Fund managers make money through the difference between the price of the unit when
bought, which is the offer price, and the price of the unit when sold, which is the bid
price. The difference between the offer price and the bid price is called the bid-offer
spread. The bid-offer spread varies.