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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
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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:
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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
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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.
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B. Structure of managed funds - Main categories we consider
- Cash management trusts
- Unit trusts
- Superannuation funds
- Hedge funds
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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
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B. Managed Funds - "Uses of funds"
Iinvested by professional fund managers according to fund’s trust deed.
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Types of Managed funds
- Capital guaranteed funds
- Capital stable funds
- Balanced growth funds
- Managed growth funds
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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
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Types of Managed funds - "Capital stable funds"
Secure contributors' investment but no guarantee of capital
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Types of Managed funds - "Balanced growth funds"
- Investments target longer-term income stream, supported by limited capital growth
- More aggressive than capital stable funds
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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
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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
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Unit Trusts - Equity trusts
Invests in different types of shares listed on stock exchanges
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Unit Trusts - Fixed-interest trusts
Invests in a range of debt securities such as government and corporate bonds
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Unit Trusts - Mortgage trusts
Invests in mortgages registered as loan securities over land
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Unit Trusts - Property trusts
- Invest in different types of property specified in the trust deed
- Incl. industrial, commercial, retail property
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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
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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
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B. Superannuation & Pension Funds - "Superannuation"
Savings accumulated by an individual to fund their retirement from the workforce
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Superannuation funds - Sources of funds
- From members who make periodic contributions & income derived from investing contributions
- May have employer contribution
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Superannuation funds - Uses of funds
Invested in wide range of assets, generally long-term that are expected to deliver growth
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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
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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
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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
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Negative Aspects
- 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
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Insurance Companies - "Why use insurance"
With the premium paid by policyholder, they entitled to determinable benefit following the occurrence of specified future event/condition
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C. Insurance Companies - "Private insurance can be grouped by products into"
- Life insurance
- Accident & Health
- Property & Liability
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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.
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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)
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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
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3. General insurance Offices
Cover specified risks, provides promise to pay predetermined amount in the event that the peril that's insured against occurs
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Types of General insurance offices
- House & Content
- Motor Vehicle
- Travel
- Medical
- Protect holders from theft, fire, natural disaster
- Policies generally short-term, variety of situations
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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
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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
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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
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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
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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.
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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
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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
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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
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