A. Merchant or investment banks (Money market corporations)
- Major difference between investment bank & ordinary commercial bank = their role in retail markets.
- In many countries, investment banks are not allowed to accept deposits by law.
- Their sources of funds (liabilities) from issue of securities into money and capital markets
A. Merchant or investment banks (Money market corporations) - "Principal sources of funds"
From their advisory operations based on earning fees for their offbalance sheet business beginning with:
the offering of financial advisory services
- in issue of new stock that they usually underwrite (IPOs)
- raising of equity & L/T debt for a company e.g. a rights issues, share placements, (seasoned offerings?
- mergers & acquisitions
- research in new financial products
- conducting feasibility studies
B. Managed Funds (Unit Trusts)
- Managed Funds (Unit trusts) have become important FIs (perform denomination intermediation) in NZ (& globally)
- Solid growth in NZ after deregulation until 1987 crash, & again in early 1990s.
- Manage approx 19% of financial assets
- Offer wide variety of services not offered or poorly by existing FIs.
B. Structure of managed funds - Main categories we consider
- Cash management trusts
- Unit trusts
- Superannuation funds
- Hedge funds
B. Managed Funds - "Sources of funds"
- Investors pool funds to invest in portfolio of securities managed by professional manager.
- May be periodic payments or lump sum put into managed funds
B. Managed Funds - "Uses of funds"
Iinvested by professional fund managers according to fund’s trust deed.
Types of Managed funds
- Capital guaranteed funds
- Capital stable funds
- Balanced growth funds
- Managed growth funds
Types of Managed funds - "Capital Guaranteed funds"
- Seek to receive back at least the value of their investment into fund
- Designed for individuals who place high value on security
Types of Managed funds - "Capital stable funds"
Secure contributors' investment but no guarantee of capital
Types of Managed funds - "Balanced growth funds"
- Investments target longer-term income stream, supported by limited capital growth
- More aggressive than capital stable funds
Types of Managed funds - "Managed growth funds"
- Seeking maximum return from capital growth
- Proportion of equity highest of all & equity likely to be companies with higher risk but good growth prospects
- Recommended for longer-term horizons
B. Managed Funds/Unit trusts - "For managed funds set up under a trust deed, these can also be grouped by the financial assets they invest in..."
- Equity trusts
- Fixed-interest trusts
- Mortgage trusts
- Property trusts
Unit Trusts - Equity trusts
Invests in different types of shares listed on stock exchanges
Unit Trusts - Fixed-interest trusts
Invests in a range of debt securities such as government and corporate bonds
Unit Trusts - Mortgage trusts
Invests in mortgages registered as loan securities over land
Unit Trusts - Property trusts
- Invest in different types of property specified in the trust deed
- Incl. industrial, commercial, retail property
1. Definitions & terms for managed funds - Listed trust & Unlisted trust
- Listed trust: units of a trust listed and traded on a stock exchange
- Unlisted trust: to sell units, holder must sell them back to trustee after giving required notice
1. Definitions & terms for managed funds - Open-ended and Closed-ended
- Open-ended: more units are created as demand increases
- Closed-ended: number of units are generally fixed
B. Superannuation & Pension Funds - "Superannuation"
Savings accumulated by an individual to fund their retirement from the workforce
Superannuation funds - Sources of funds
- From members who make periodic contributions & income derived from investing contributions
- May have employer contribution
Superannuation funds - Uses of funds
Invested in wide range of assets, generally long-term that are expected to deliver growth
Advantages of managed funds
- Pooling of funds by small investors which ⇒ investment activities on larger scale
- Spread of risk/safety & diversification
- Professional management have access to more information
Issues regarding active management
- To do better than the benchmark, manager needs to move away from it → How far?
- Suitability of index if they move away from it?
- Stock selection/ market timing
- What are the risks? Higher/lower
- Does performance persist?
- Fees involved
Safeguards for Investors in NZ
- Constituted by a trust (sets out rules), auditor required
- Parties to trust deed - independent trustees & manager of trust
- Approval by Justice Department for NZ managed funds
- Statutory disclosure statement must be supplied to prospective investor before he/she signs the application form
- Fund performance- managers don’t tend to outperform market
- It has not been shown that private investors or company investors perform less well
- Not much persistency in performance
- High Fees
- Governance issues
Insurance Companies - "Why use insurance"
With the premium paid by policyholder, they entitled to determinable benefit following the occurrence of specified future event/condition
C. Insurance Companies - "Private insurance can be grouped by products into"
- Life insurance
- Accident & Health
- Property & Liability
1. Life Insurance Companies - "Sources of funds"
- Offer contractual products
- Whole of life: L/T policy paid out @ death of holder
- Term: pay specified amount @ death if occurred during term
- Other insurance policies may be added on.
1. Life Insurance Companies - "Uses of funds"
Invest the bulk of funds in L/T securities, to match their L/T liabilities (so help to fund real capital investment in economies)
2. Accident & Health Insurance Companies
- Total & permanent disablement policy: Policy covering loss of limbs or total inability to resume occupation
- Often an extension of life insurance policies
- In NZ, perceived under funding of health service - leads to inc. in health insurance
- Policy pays lumo sum or annuity
3. General insurance Offices
Cover specified risks, provides promise to pay predetermined amount in the event that the peril that's insured against occurs
Types of General insurance offices
- House & Content
- Motor Vehicle
- Protect holders from theft, fire, natural disaster
- Policies generally short-term, variety of situations
3. General insurance Offices - "House and Contents Insurance"
- Financial protection in event of loss/damage to residential proerty
- Co-insurance essentially under-insurance - house covered for $500,000 but replacement cost $600,000 so policy holder self-insured for $100,000
3. General insurance Offices - "Motor Vehicle Insurance"
- Policy/policies in the event of an accident relating to motor vehicles
- Comprehensive: Damage insured vehicle + 3rd party/property damage
- Third-party, Fire & Theft: Policy fr any 3rd party veh./prop, fire, theft
- Third party only
3. General insurance Offices - issues
- Question of cover - generally items only covered up to certain value & specified items to be listed in schedule attached
- Issue of replacement or equivalent value for contents insurance
- Difficulty of predicting losses - hold more liquid assets
Regulation of Insurance Sector
- The Insurance (Prudential Supervision) Act 2010 is administered by the Reserve Bank for the purposes of:
- (a) promoting the maintenance of a sound and efficient insurance sector; and
- (b) promoting public confidence in the insurance sector
Regulation of Insurance Sector - Aspects of Insurance (Prudential Supervision) Act 2010
- The Act applies to all insurers carrying on business in New Zealand (as defined by the Act) and includes:
- Licensing system for insurers, based on meeting the Act's prudential requirements;
- Supervision by the Bank of compliance with the prudential requirements; and
- Powers under the Act for the Reserve Bank in respect of insurers in financial distress or other difficulties.
D. Finance Companies
- Borrow funds direct from markets to provide loans and lease finance to customers
- First finance company began in NZ in 1920s. Major growth-1950s onwards.
- Banks → short-term finance via overdraft, & L/T finance via mortgage over real property
- Finance companies → 3-5 year funding with land, buildings, plant & equipment as collateral
D. Finance Companies - "Sources of funds"
- loans from banks
- issue of debentures or “term deposits” to retail & wholesale investors
- unsecured notes borrowing from related companies & capital markets
- lines of credit from other FIs
D. Finance Companies - "Uses of funds"
- Generally higher risk areas (often lend out at large margins). Niche markets still exists for them
- Involved in property development, lease financing, loans to companies, factoring