An Introduction to Fund Management E-Book

Ray Russell

• Herausgeber: John Wiley & Sons
• Kategorie: Fachliteratur
• Serie: Securities and Investment Institute
• Sprache: Englisch

Seitenzahl: 180

Veröffentlichungsjahr: 2011

Beschreibung

An Introduction to Fund Management introduces readers to the economic rationale for the existence of funds, the different types available, investment strategies and many other related issues from the perspective of the investment manager. It gives an overview of the whole business and explores the process and techniques of fund management, performance measurement and fund administration. This updated edition reflects new regulatory changes and industry developments.

Leseprobe

Table of Contents

The Securities & Investment Institute

Title Page

Copyright Page

PREFACE

ABOUT THE AUTHOR

Chapter 1 - INTRODUCTION

ECONOMIC BACKGROUND

Chapter 2 - ROLE OF FUNDS

FEATURES AND CHARACTERISTICS

INVESTOR PROTECTION

ESTABLISHING A FUND

Chapter 3 - PORTFOLIO MANAGEMENT

CHOOSING THE INVESTMENTS

Chapter 4 - PORTFOLIO ADMINISTRATION

‘Day by day in every way ...’

Buying and selling

Delivery and settlement

Registration

Custody

Use of nominees

Stock exchange reporting

Records and regulations

Portfolio accounting and controls

Profits, income and taxation

Valuation and pricing

Chapter 5 - INVESTOR ADMINISTRATION

Agents, agreements and delegation

Investor transactions

Registration

Communicating with investors

Chapter 6 - PERFORMANCE MEASUREMENT

Sector comparisons — ‘my fund is better than your fund’

Yields and returns

Time- and money-weighted returns

Indices and benchmarking

Volatility and risk adjustments

Chapter 7 - INVESTMENT MATHEMATICS

The arithmetic of indices

Standard deviation

Capital Asset Pricing Model

GLOSSARY

ABBREVIATIONS

INDEX

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ISBN-13 978-0-470-01770-8 (PB)

ISBN-10 0-470-01770-8 (PB)

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PREFACE

This guide is derived from the author’s notes for the 2-day course of the same name that he presented for the Securities and Investment Institute.

It is neither a transcript of the course, nor a fully comprehensive work of reference. Rather, it is intended as an introductory text for those new to or unfamiliar with investments and asset management by providing a broad and practical description of investment funds and fund management from a number of perspectives and to stimulate further, more detailed study.

Starting with the general economic background and rationale for the existence of funds, it moves through a description of the features and characteristics of different types of funds, and the associated regulatory and investor protection mechanisms, to the process of establishing a fund.

It then addresses the topic from the perspective of the portfolio manager, by providing an overview of the principal investment strategies and styles deployed in the construction of portfolios, and of their administration, before covering investor administration and, finally, the mathematics and methods of performance measurement.

Your own understanding of fund management after reading this guide will depend upon your interest and aspirations, your appetite for and approach to learning, and, of course, your expectations of the guide, which, please note, is an introduction to the subject; it will not make you an expert!

ABOUT THE AUTHOR

Ray Russell FCMA, FCIS, MSI, CertPFS, ACoI is the Principal of GCR Management Services, a consultancy and training organisation he founded in 1988 to provide assistance to investment businesses.

His background includes 10 years as Compliance & Business Development Director of a UK fund management and administration group of companies, and more than 20 years in senior positions with prominent British and American investment banks.

An industry figure, he has served as a consultant to the Securities and Investment Institute for its investment administration qualifications, and on the Investment Management Association’s Executive, Regulations, Audit and Training Committees, and is the founder and chairman of its collective investment schemes working practices Technical Discussion Group.

Chapter 1

INTRODUCTION

Fund management is, self-evidently, about managing funds.

We tend to use the word funds rather loosely. It can refer to our own hard-earned cash, whether in our pockets or held at a bank, or to the equally hard cash that constitutes the initial amount of capital we have available for investment, as well as to the vehicles or medium through which our resulting investments are made and managed.

Thus, you have personal funds, comprising the pound in your pocket and the balances you have in your bank or building society account, some of which is likely to be committed funds, needed to cover current expenditure, and some of which may not be required for some time, but, nonetheless, is earmarked for a future event. If there’s any surplus beyond these two types of commitment, apart from being among the fortunate few, you have spare funds.

What you choose to do with your spare funds — and, indeed, with the funds that are not required until some time in the future — is a personal matter. You may regard spare funds as ‘fun money’ and opt to spend it on whatever takes your fancy. You may take a more responsible attitude to funds set aside or building up to meet future commitments or ambitions, but equally well, may feel you can afford to place at least some of it into an ‘investment’, as distinct from leaving it to the potential ravages of inflation as ‘savings’.

This is where the second use of the word funds comes in.

Most individuals lack substantial wealth or enough wealth to make the investment of their personal funds directly into stocks, shares and other investment assets a practical and low-risk endeavour. Equally, most people lack the professional expertise and knowledge of business, markets and individual companies to identify the sheep from the goats, as it were. Then, of course, there’s the time and the paperwork associated with keeping track of a personal portfolio and with keeping an eye on your taxation opportunities and obligations — especially onerous under self-assessment.

The advantages and commercial benefits of pooling the modest savings or spare money of a large number of individuals have long been manifest in the form of ‘funds’ managed centrally by organisations which can provide all the investment and administrative services you could wish for. In its simplest sense, ‘fund’ could be the Christmas Club or Tontine run from your local club, pub or investment club, but, for the purposes of this guide, we are talking about broader based offerings from institutions such as banks, life companies, pension funds, unit trust managers, stockbrokers and specialist investment houses.

ECONOMIC BACKGROUND

This section is about the money we can think of as capital and about investments and investors. Capital is essentially an accounting term that distinguishes the primary amount of money committed to investment from the income that arises from its investment or other deployment.

‘Money makes the world go round’

Money is the oil for the wheels of economic activity and, like any commodity, there are those among us who need more than we can generate from our own resources and, fortunately, those who have a surplus to their own requirements.

These are for our purposes the users and the suppliers of capital. In economic terms, users require capital to finance production, whether of goods or services — i.e., to pay for the acquisition and deployment of resources, which can be raw materials, physical plant and equipment or labour or, as they are known today, human resources.

The amount of money required obviously depends upon a number of factors — the scale of the endeavour, the cost of the various resources, how long before the goods or services are ready to be sold, what further costs are involved in preparing them for market, delivering them to customers, after-sales service and so on.

The amount will also vary according to where the user is in the life of the endeavour. The amount required to establish a business and to finance initial production — known as start-up capital — may be considerable. Similarly, the amount required to maintain production, sales and administration once the business has been established — known as working capital — may be significantly beyond the immediate resources of the business owner. It is only when the revenues from sales come on stream that the business begins to generate cash and the owners can experience a reduction in the need for externally provided capital.

‘Money doesn’t grow on trees’

Having established that his own funds are insufficient for the enterprise in contemplation, the user of capital needs to find suppliers of capital.

If the amount required is modest, it may well be within the compass of family and friends, but more likely the user will need to look further afield to institutional lenders or investors or, if the business qualifies, to government agencies for grants.

Almost immediately, the user will have to confront issues of control, risk and reward, as the type and terms of lenders’ or investors’ capital are negotiated. Not all avenues will be open to all users, because not only is the actual amount required a factor, but so are the status of the user in terms of reputation, credit-worthiness and business skills, the anticipated length of time the money is required, whether security is required or available, and, similarly, whether an involvement in the running of the business and/or a share in the expected future profits are required or offered, and, of course, the extent to which the user wants to limit liability for the debts of his enterprise.

Risks and rewards

Matching users with suppliers is largely a function of the respective parties’ appetite for and attitude towards risk, and their desires and expectations for reward, either to be received as a supplier or given up as a user.

Again assuming some basic knowledge of the structure of limited liability companies, there are different forms that the supply of capital can take and different considerations which apply to the selection of each particular form.

Equity capital

Equity capital denotes the supplier has an ownership interest in the business that is using the capital, and shares in the risks and the rewards associated with operation of the business. If the business is adjudged to represent a sound and profitable venture, the user should have little difficulty finding suppliers of equity. On the other hand, the user will not want to give up more profit or control than is absolutely necessary.

Of interest, possibly, is that the members of William Shakespeare’s company — essentially a co-operative — were known as sharers and that today’s actors’ trade union is called Equity.

Ordinary shares

Ordinary shares are the most common form of equity capital. Indeed, in the USA and elsewhere, such shares are known as common shares. They provide the permanent capital of the business. The holders have no rights to repayment from the company except upon it being wound up, and then only if there are enough assets to provide a surplus after all debts and preferential creditors have been repaid. As the bearers of the greatest risk, however, ordinary shareholders are entitled to the entire surplus earnings and assets of a business once all other claims have been fulfilled. The higher the risk, the higher the ordinary shareholder expects his reward, either in the form of dividends from distributed profits or from capital growth in the value of his investment from re-invested profits or expectations of future profits.

Preference shares

Preference shares are another form of equity capital and, as the name suggests, the supplier has some preference over ordinary shareholders. Usually, this has to do with the payment and the rate of dividend, which is payable before any dividend can be paid to ordinary shareholders, and, in the event of a winding-up, preference in the allocation of assets or the proceeds from their sale. The suppliers of preference share capital are taking some of the risks associated with ownership — there may be insufficient proceeds from a liquidation to pay them out, either in full or at all, and, particularly in the early years, profits may either not be earned or not earned in sufficient amount to pay the expected dividend. However, the risks are somewhat lower than those of the ordinary shareholder.

Loan or debt capital

Loans and loan stocks are the form of capital favoured by suppliers who want to take minimal risk and seek neither the privileges nor the pitfalls of ownership. The reward for such suppliers is interest, which for the user is a charge on earnings rather than a share of profit, and, on agreed terms, repayment in full. The simplest form is the bank loan, but businesses can raise loan or debt capital by the issue of debenture stock, the terms of which can include fixed or variable interest, phased repayment, unsecured or secured on assets of the business or by guarantee, and rights to convert the stock into equity capital at predetermined future times and on predetermined terms.

When speaking of debt capital, we are, of course, referring to the funds raised by companies engaged in some productive activity and supplied in the form of a repayable debt instrument, quite often styled a corporate bond. Note also that governments are major issuers of debt instruments to raise capital for a variety of purposes — government bonds or gilts, so-called because the original certificates provided to lenders were edged in gold leaf, hence gilt-edged securities.

Money-market instruments

Though not a form of capital, it is worth mentioning that both users and suppliers make use of the money market when surplus capital needs to be deployed for the short term and with little or no risk of loss. Instruments available include Certificates of Deposit (CDs) issued by banks, Commercial Paper (CP) issued by major companies, and Treasury Bills issued by the government.

Considerations

Users and suppliers both need to consider the same factors from their different perspectives. For how long is the money required — short term, long term, permanently? What incentives are offered/required to attract the individual types of capital? What is the business climate, both generally and for the business in question? What is the market for the goods or services and what is market sentiment? Fashion? Politics?

All of these factors will affect the demand for and the supply and the price of each type of capital.

At certain times the fashion may be for the supply of equity capital; at others, suppliers may be comparatively risk-averse and prefer loan capital, particularly if the business is speculative or the user an unknown or untried individual or group of people. Consider how users and suppliers would confront the imaginary companies, Solid Surething plc and Dodgy Dot Com Ltd.

Whatever the reason, money, and hence capital, is a commodity and its price will be set to reflect supply, demand, risks and their ratings, users and their reputation and credit ratings, availability of security or collateral, and, possibly most importantly, the likelihood of and ease of achieving repayment or realisation. Other factors include, for equity capital, any discount or premium in relation to underlying net asset value (actual or perceived) and any ‘perks’ on offer, and, for debt capital, prevailing market interest rates. In both cases, the conceptual appeal of the enterprise will also have a bearing — Eurotunnel, for example.

Markets

If the business is a large enterprise, then the instruments representing ownership or supply of the various forms of capital will probably themselves be capable of assignment or transfer to another person, and we have, thereby, the concept of transferable securities and the opportunity for a market in the investments themselves.

Short-term funding usually takes the form of bank lending and banks themselves operate a money market on which supply and demand can be balanced and prices — i.e., interest rates — set accordingly, based upon prevailing and expected future conditions, the status of the borrower and the time period for which money is required, which can be as short as overnight or as long as a year or two. The amounts can be very big and sometimes too big for one bank to supply, in which case a syndicate of lending banks may be organised by the ‘lead bank’ to raise the required loan.

The term money market is applied to sterling-denominated instruments, and a variation on the money market is the foreign exchange market, which facilitates both the financing of trade denominated in foreign currencies and the trading of the currencies and currency instruments themselves.

Medium- to long-term funding is likely to take the form of equity capital or loan stock, both of which can be traded on a stock exchange.

Markets perform two important and related functions. As a recognised forum for the purpose of matching users and suppliers of capital, a market can operate both as a primary market, wherein the initial or new capital is raised, and as a secondary market, wherein the suppliers of capital may trade amongst themselves and transfer ownership of the various types of capital raised by the user.

Investment instruments

‘Instrument’ is simply the generic name given to documents evidencing ownership or supply of the various forms of capital. Increasingly in a dematerialised world, where such evidence is purely a record held in electronic form, ‘instrument’ has come to mean also the form of capital itself.

‘Neither a borrower nor a lender be’

Economic activity, the wealth of a community and the rate of growth in both depends, on the one hand, on the existence of innovators, producers and entrepreneurs, generally, and, on the other, their backers or people willing to put at risk their own funds to support the activity. So, the captioned admonition is misguided except in the limited context of managing one’s own affairs or funds prudently!

Investors are crucial to the health, wealth and growth of an economy and the profile of an investor is what summarises his or her objectives, attitude toward risk and liquidity, and the timescale over which those objectives and attitudes apply.

The most important decisions a supplier of capital has to make are the extent to which he wants to share the business risks, and, if this is ‘not at all’, the terms on which he is happy to lend.

Chapter 2

ROLE OF FUNDS

Definitions

I refer you back to the introduction for the definition of ‘funds’, which for our purpose is the mechanism whereby the contributions of many individuals are pooled and managed as a single fund.