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AN INTRODUCTION TO FUND MANAGEMENT Third Edition Ray Russell FCMA, FCIS, MSI, CertPFS, ACoI AN INTRODUCTION TO FUND MANAGEMENT Third Edition The Securities & Investment Institute Mission Statement: To set standards of professional excellence and integrity for the investment and securities industry, providing qualifications and promoting the highest level of competence to our members, other individuals and firms The Securities and Investment Institute is the UK’s leading professional and membership body for practitioners in the securities and investment industry, with more than 16,000 members with an increasing number working outside the UK It is also the major examining body for the industry, with a full range of qualifications aimed at people entering and working in it More than 30,000 examinations are taken annually in more than 30 countries You can contact us through our website Our membership believes that keeping up to date is central to professional development We are delighted to endorse the Wiley/SII publishing partnership and recommend this series of books to our members and all those who work in the industry As part of the SII CPD Scheme, reading relevant financial publications earns members of the Securities & Investment Institute the appropriate number of CPD hours under the Self-Directed learning category For further information, please visit Ruth Martin Managing Director AN INTRODUCTION TO FUND MANAGEMENT Third Edition Ray Russell FCMA, FCIS, MSI, CertPFS, ACoI Copyright # 2006 John Wiley & Sons Ltd, The Atrium, Southern Gate, Chichester, West Sussex PO19 8SQ, England Telephone (þ44) 1243 779777 Email (for orders and customer service enquiries): Visit our Home Page on Reprinted with corrections September 2006 All Rights Reserved No part of this publication may be reproduced, stored in a retrieval system or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning or otherwise, except under the terms of the Copyright, Designs and Patents Act 1988 or under the terms of a licence issued by the Copyright Licensing Agency Ltd, 90 Tottenham Court Road, London W1T 4LP, UK, without the permission in writing of the Publisher Requests to the Publisher should be addressed to the Permissions Department, John Wiley & Sons Ltd, The Atrium, Southern Gate, Chichester, West Sussex PO19 8SQ, England, or emailed to, or faxed to (þ44) 1243 770620 Designations used by companies to distinguish their products are often claimed as trademarks All brand names and product names used in this book are trade names, trademarks or registered trademarks of their respective owners The Publisher is not associated with any product or vendor mentioned in this book This publication is designed to provide accurate and authoritative information in regard to the subject matter covered It is sold on the understanding that the Publisher is not engaged in rendering professional services If professional advice or other expert assistance is required, the services of a competent professional should be sought Other Wiley Editorial Offices John Wiley & Sons, Inc., 111 River Street, Hoboken, NJ 07030, USA Jossey-Bass, 989 Market Street, San Francisco, CA 94103-1741, USA Wiley-VCH Verlag GmbH, Boschstr 12, D-69469 Weinheim, Germany John Wiley & Sons Australia Ltd, 42 McDougall Street, Milton, Queensland 4064, Australia John Wiley & Sons (Asia) Pte Ltd, Clementi Loop #02-01, Jin Xing Distripark, Singapore 129809 John Wiley & Sons Canada Ltd, 22 Worcester Road, Etobicoke, Ontario, Canada M9W 1L1 Wiley also publishes its books in a variety of electronic formats Some content that appears in print may not be available in electronic books British Library Cataloguing in Publication Data A catalogue record for this book is available from the British Library ISBN-13 978-0-470-01770-8 (PB) ISBN-10 0-470-01770-8 (PB) Project management by Originator, Gt Yarmouth, Norfolk (typeset in 12/16pt Trump Mediaeval) Printed and bound in Great Britain by T.J International Ltd, Padstow, Cornwall This book is printed on acid-free paper responsibly manufactured from sustainable forestry in which at least two trees are planted for each one used for paper production CONTENTS Preface About the author INTRODUCTION xi xiii Economic background ‘Money makes the world go round’ ‘Money doesn’t grow on trees’ Risks and rewards Considerations Markets 10 Investment instruments 11 ‘Neither a borrower nor a lender be’ 12 ROLE OF FUNDS 13 Definitions 14 Investment businesses 15 vi CONTENTS Types of fund 16 Open-ended and closed-ended funds 23 Uses of funds 24 Associated packaging 25 Features and characteristics 25 Purpose, providers and players 25 Costs, benefits and comparisons 27 How to invest 31 Sales, marketing and disclosure 31 Categories, sectors and statistics 32 Investor protection 33 ‘Be it enacted by the Queen’s most Excellent Majesty ’ 33 Regulation in practice 42 Establishing a fund 47 Who wants one and why? 47 Options and approaches 48 Documents and authorisations 50 Launching the fund 51 CONTENTS vii PORTFOLIO MANAGEMENT 53 Strategies, styles, objectives and policies 54 Meeting investors’ requirements 56 Risks to be managed 57 Hedging 59 ‘Please don’t ask for credit ’ 62 ‘You can’t that!’ 63 Asset allocation versus stock selection 65 Choosing the investments 66 ‘First, pick your markets’ 66 Portfolio weightings and profiles 68 Income and growth 69 Liquidity 70 Evaluating alternatives 71 Data, ratios and measurements 75 Dealing with events 78 News and announcements 79 New issues and underwriting 81 Rights, splits and scrip 83 Breaches of regulations 85 160 common shares see also ordinary shares communications changes 110À11 charges 111 company announcements 79À81, 90À1 conversions of funds 112 distributions 110 investors 27, 109À13 meetings 112À13 mergers 111 reports 109À10 Companies Acts 19, 39, 92 company announcements 79À81, 90À1 company data, evaluation 73, 75À8, 79À81 Company REFS 73 comparisons, funds 30À1, 115À32 compensation 24, 46 Competition Commission 39 complaints 46 compliance 14, 20, 27À8, 32, 45À6, 48À9, 94À6, 105 computer systems 67À8, 74, 89, 107 concepts, fund management 2À12 consideration, definition 107 consolidations, capital 84 Consols 122 constitutional documents, funds 64À5, 71 constraints, fund managers 63À5, 94À6, 104À13 construction, indices 127, 134À7 contingencies 78À81 contract notes, definition 107 INDEX controlled functions 43À4 controls, portfolio administration 94À5 conversions, funds 112 convertible debt 8, 78, 83À4, 108 cooling-off periods 32, 46 corporate bonds see also bonds concepts corporate governance 40, 46 corporate management 14 corporation tax 97 see also taxation costs see also charges; pricing churning costs 55 company data 75 funds 27À31, 58, 70À1, 78, 88À9, 96À8, 111 futures 60 investors 28, 58, 96À8, 111 managers 27À8, 47À8, 88À9, 96À8, 111 marketing 27À8, 47À8 options 60 Council of European Securities Regulators (CESR) 41 coupon 121À3 see also interest payments covariance 141À2 covered positions 62 CP see Commercial Paper creation price, dual-pricing system 100À1 creditworthiness, users of capital 5À6, 9À10 CREST 67À8 Criminal Justice Act 38À9 current ratio 75 current yield 119À20 INDEX custodians 15, 26À7, 48, 91, 104À13 see also depositary data evaluation 73, 75À8, 79À81, 94À5, 98À101, 115À32 Data Protection Act 39, 108À9 dates, importance 109 dealing concepts 29, 106 fund benefits 29 dealings of directors 39, 76 debentures, concepts 8À9, 83À4 debt/loan capital see also capital concepts 89, 10À11, 62À3 convertible debt 8, 78, 83À4, 108 interest payments 8À9, 10À11, 63, 120À3 pricing 10À11 risks/rewards 8À9 types 8À9 decision-making 58À9, 61À2, 65À85, 129À30, 143À4 concepts 58À9, 65À85 evaluating alternatives 71À7 information needs 58À9, 71À7, 79À81 reasons 65 decision-support systems 71À2 deferred taxation 78À9 defined benefit pension schemes 16À17 delegation see also outsourcing investor administration 104À5 regulations 104 delivery requirements, administration 89 161 demand/supply considerations, capital 9À10, 81À5 dematerialised instruments, concepts 11, 98, 107 Department of Trade and Industry (DTI) 34 deposit taking 15, 38 deposit-based savings, performance 30À1 depositary 19, 26À7, 51, 91, 104À13 see also custodians derivatives 22, 60À2 see also future; options hedge funds 22, 60À2 designated investment businesses, concepts 15 Designated Investment Exchange (DIE) 42 Designated Professional Bodies (DPBs) 41 designated territories, offshore funds 20À1, 50 DIE see Designated Investment Exchange dilution levies, OEICs 19 directors see also boards corporate governance 40 dealings 39, 76 disclosures 31À2, 39, 71 discontinuing funds 111 discounts cash flows 127 net asset values 10, 18, 24 distance contracts 32, 37À8 Distance Marketing Directive 37 162 distributions communications 110 interest distributions 97À8 diversified portfolios 24, 29, 56, 58À9, 76À8, 143À5 dividend yield 76, 119À23 dividends announcements 90À1 concepts 7À9, 21, 84À5, 90À1, 110, 119À23 scrip issues 84À5 taxation 122À3 documentation standards 45À6, 50À1, 64, 71, 93À8 see also registers Dow Jones Industrial index 135 DTI see Department of Trade and Industry dual capacity firms 36 dual-pricing system 28, 99À101 duration considerations, funds 47À8 duty of care, trustees 65 earnings per share (EPS) 75À6 economic background 31À2 economies asset allocation 61À2, 65À85 news 80 efficient markets see also capital asset pricing model concepts 76À8, 139À45 efficient portfolio management 62 see also hedging EGMs see extraordinary general meetings electronic operations, markets 67À8, 74, 89, 107 Enforcement Division, FSA 44 INDEX entrepreneurs, importance 12 EPS see earnings per share Equity, actors’ union equity capital see also capital; shares concepts 6À9, 21À2 pricing 10 risks/rewards 6À9 types 6À8 establishment, funds 47À52 ethical investors 142À3 Euronext.LIFFE 60À2, 66 European Commission 39 European Communities Act 1972 19 European Union (EU) 19, 20, 36À7, 41 Capital Adequacy Directive 37 CESR 41 directives 36À7 Distance Marketing Directive 37 Investing Services Directive (ISD) 37 Savings Directive 97 UCITS Directive 1985 36À7, 49À50, 64 Eurotunnel 10 events 58À9, 72À4, 78À81, 93 concepts 58À9, 72À4, 78À81, 93 dealing 78À81 ex-dividend dates 90 exit charges 28 extraordinary general meetings (EGMs) 113 fashions 9À10 FCP, UCITS funds 20À1, 22 INDEX features and characteristics, funds 25À33, 48À52 feeder funds, concepts 22 final salary schemes see defined benefit pension schemes financial markets see also markets concepts 9À11, 36, 66À8 historical background 66 members 66À8 Financial Reporting Council 40 financial reports, company data 75À8 Financial Services Act 1986 (FSact) 34, 36À7 background 34, 36À7 enactment 36À7 Financial Services Authority (FSA) 17, 19, 20, 28, 33À5, 38À52, 64À5, 99À100, 106À7, 117À18 see also regulations Advanced Risk Responsive Operating Framework (ARROW) 43À4 approved persons 41, 43À5 authorisations 43À5, 50À2 categorised funds 33, 117À18 Code of Market Conduct 40, 107 derivatives 62 documentation standards 45À6, 50À1, 93À4 Enforcement Division 44 fines 28, 44À5, 79 gearing 63 Handbook of principles 40À2, 45À6 inspection visits 43À4 ‘lighter touch’ treatments 45 163 listing rules 39, 93, 107 meetings 113 objectives 34À5, 38À41, 42À52 penalties 28, 44À5, 79, 85 powers 34, 38À52 prudence requirements 64 risk ratings 42À3 ‘treating customers fairly’ requirement 43, 93À4 UCITS 33, 49À50 valuations 99À100 ‘whistleblowers’ 45À6 Financial Services Compensation Scheme 24 Financial Services and Markets Act 2000 (FSMA) 15, 33À46 concepts 15, 33À46 enactment 33, 36À7 historical background 33À6 Threshold Conditions 42 fines, FSA 28, 44À5, 79 fixed trusts 23 forecast yield 119À20 foreign exchange market, concepts 11, 58À9 Forsyte Sage (Galsworthy) 88 France 20, 22 fraud 32, 35À46, 57À8, 79 friendly societies 33À4 front-end charges see initial charges front-offices, fund management companies 14 FSA see Financial Services Authority FSAct see Financial Services Act 1986 FSMA see Financial Services and Markets Act 2000 FT Ordinary index 136 164 FT-A All Share index 121À2, 137 FTSE 100 index 60À1, 121À2, 127À8, 137 fully invested portfolios, concepts 69 fund of funds, concepts 22, 37 fund management see also portfolio active management 54À6, 130 bottom-up style 54À6, 65, 68À9 churning costs 55 concepts 2À12, 14, 54À6 definition 14 introduction 1À12 passive management 54À6 performance 30À1, 32À3, 58À9, 72, 73, 75À8, 94À5, 109À10, 115À32, 134À45 styles 54À6, 65, 130 top-down style 54À6, 65, 68À9 fund management companies, functions 14 fund managers 14, 31, 54À9, 63À5 see also regulations benefits 30 compliance needs 14, 20, 27À8, 32, 45À6, 48À9, 94À6, 105 constraints 63À5, 94À6, 104À13 costs 27À8, 47À8, 88À9, 96À8, 111 decision-making 58À9, 65À85 delegation constraints 104À5 fines 28, 44À5, 79, 85 incompetent managers 58 information needs 58À9, 71-7, 79À81 INDEX intermediation facilitation 14 penalties 28, 44À5, 79, 85 prudence requirements 64À5 reputations 58 responsibilities 14, 58, 63À5, 104À13 styles 54À6, 65, 130 successful managers 31, 72, 73À4, 145 fundamental analysis 72À8 see also quantitative analysis funds see also portfolio asset-orientation classification 21À2 associated packaging 25 authorisations 43À5, 50À2 benefits 29À31 categories 21À2, 32À3, 48À52, 117À18 charges 17, 19, 28À31, 70À1, 78, 88À9, 96À8 classifications 21À2, 32À3, 48, 117À18 comparisons 30À1, 115À32 concepts 2À12, 14, 16À33 constitutional documents 64À5, 71 conversions 112 costs 27À31, 58, 70À1, 78, 88À9, 96À8, 111 definition 2À3, 14 disclosures 31À2, 39, 71 documentation standards 45À6, 50À1, 64, 71, 93À8 duration considerations 47À8 establishment 47À52 features and characteristics 25À33, 48À52 how-to-invest methods 31 INDEX interest distributions 97À8 investment-objective classification 22 launching the fund 51À2 legal structure 22 legislation 15, 19, 22, 33À46 liquidity 69, 70À1 managers 18À19, 26À33, 47À52 marketing 14, 27, 31À2, 37, 46, 52 mergers 111 objectives 54À6, 64À5, 110À11 performance 30À1, 32À3, 58À9, 72, 73, 75À8, 94À5, 109À10, 115À32, 134À45 players 15, 17À33, 104À7 pricing 17, 18, 19, 24, 51À2, 98À101 providers 26À33 purposes 25À33 returns 33, 75, 76, 118À27, 137À45 role 13À52 sales 31À2 sectors 32À3, 76, 116À19, 127À32 taxation 18, 20, 21, 29, 49À50, 64, 78À9, 88À9, 96À8 timescales 47À8, 51À2, 59 types 2À3, 16À24, 26À7, 48À52, 69À70 uses 2À3, 16, 24À33 valuations 98À101 futures 22, 60À2 see also derivatives Galsworthy, John 88 gearing see also debt concepts 62À3 165 geometric indices 135À7 see also indices gilts see government bonds glossary 147À60 government bonds (gilts) see also bonds concepts 8, 62À3, 120À3 governments grants Labour Government (1997 onwards) 36, 122À3 grey market 81 growth funds 17, 22, 28, 48, 69À70, 73, 77, 91À2, 118À19 guarantees Handbook of principles, FSA 40À2, 45À6 hedge funds concepts 21À2, 59À62 derivatives 22, 60À2 short-selling strategies 22 hedging techniques 22, 59À62 historic distribution yield 119À20 HM Revenue & Customs 38, 55, 64À5, 97 see also taxation how-to-invest methods 31 ICVCs see Investment Companies with Variable Capital idiosyncratic risk see unsystematic risk IMA see Investment Management Association income, portfolio administration 96À8 income funds 17, 22, 48, 69À70, 76À8, 118À23 166 income tax 21, 49, 97À8 see also taxation VCTs 21 income yield, income funds 76À8 incompetent fund managers 58 index contracts 61À2 index funds see tracker funds index yield 121À3 indices arithmetic indices 134À5 concepts 127À30, 134À7 construction 127, 134À7 Dow Jones Industrial index 135 FT-A All Share index 121À2, 137 FTSE 100 index 60À1, 121À2, 127À8, 137 geometric indices 135À7 mathematics 134À7 Nikkei Stock Average index 135 Nikkei-Dow index 61, 128À9 re-basing techniques 134À7 relative performance 127À30 S&P 500 index 61, 128À9, 137 weighted arithmetic indices 136À7 Individual Savings Accounts (ISAs) concepts 25, 30, 92, 106, 112, 123 nominees 92 trends 30 inflation information company announcements 79À81, 90À1 Data Protection Act 39, 108À9 INDEX decision-making 71À7, 79À81 efficient markets 76À8 fund managers 58À9, 71À7, 79À81 markets 76À8, 79À81 news 58À9, 78À81, 93 regulations 46 initial charges 28 innovators, importance 12 inspection visits, FSA 43À4 Institute of Chartered Accountants 41 institutional investors 3, 5, 16, 26, 47, 65 see also wholesale market types 3, 16 uses 5, 16, 47 instruments, definition 11 insurance businesses 15, 26 interest distributions 97À8 interest payments, debt/loan capital 8À9, 10À11, 63, 120À3 interest rates 10À11, 30, 58À9 intermediation facilitation, fund managers 14 internal audits, corporate governance 40 internal rate of return 120 Internet 32, 41, 50 Investing Services Directive (ISD) 37 investment businesses concepts 15, 38, 41À6 definition 15, 38 risk ratings 42À3 investment companies, concepts 15, 18À19 Investment Companies with INDEX Variable Capital (ICVCs) 18À19 investment houses 26 investment instruments, concepts 11À12 investment management 27 Investment Management Association (IMA) 30, 32À3, 51, 118 investment mathematics 133À45 CAPM 76À8, 139À45 indices 127À30, 134À7 Jensen measure 145 Sharpe measure 138À9, 143À5 standard deviation 137À45 Treynor measure 144À5 investment trusts 15, 18À19, 23À4, 26À7, 63, 106À7 see also closed-ended funds articles of association 63 boards of directors 18À19, 26À7 concepts 15, 18, 23À4, 26À7, 106À7 definition 18 historical background 23À4 pricing 18, 24 investment objective classification, funds 22 investments concepts 2À12, 15, 38 definition 15, 38 investor administration agents 104À5, 108 changes 104À5, 108À11 Client Money Rules 107 communications 27, 79À81, 90À1, 109À13 concepts 103À13 167 delegation 104À5 meetings 112À13 registration functions 26À7, 89À92, 104À5, 108À9 SLAs 105 investor protection see also regulations concepts 33À46, 63À5, 94À6, 105À13 investors see also institutional investors; suppliers benefits 29À30 Client Money Rules 107 communications 27, 79À81, 90À1, 109À13 concepts 3À12, 24À46, 56À7, 76À8, 103À13 costs 28, 58, 96À8, 111 ethical investors 142À3 how-to-invest methods 31 importance 12 meetings 112À13 payment methods 31, 106À7 requirements 56À7 risk profiles 56À7 risks 56À9 taxation considerations 57 transaction processing 14, 94À8, 105À8 voting rights 112À13 Ireland 20 ISAs see Individual Savings Accounts ISD see Investing Services Directive Isle of Man 21 Jensen measure 145 jobbers 35À6, 67 168 Labour Government (1997 onwards) 36, 122À3 Laspeyre Index 137 launching the fund 51À2 Law Society 41 lawyers 41 lead underwriters 82À3 Leeson, Nick 58 legal structure see also regulations funds 22 legislation 15, 19, 22, 33À46, 65 see also individual Acts; regulations background 33À46, 65 FSMA 33À46 historical background 34À8 origins 34À5 lending 62À3 see also debt liabilities, current ratio 75 life companies 3, 15À16, 25, 30À1, 119 see also institutional investors concepts 15À16 life funds capital gains 97 concepts 16, 25, 30À1, 57, 70, 97À8, 119 definition 16 ‘lighter touch’ treatments, FSA 45 limit trading 74 limited liability companies, concepts 6À9, 18À19, 22, 92 liquidity, funds 69, 70À1 listed companies 19, 21, 39, 93, 106À7 see also stock exchanges INDEX AIM-listed companies 21 regulations 39, 93, 106À7 listing rules, FSA 39, 93, 107 Lloyd’s syndicates 38 LME see London Metal Exchange loan capital see debt/loan capital London Metal Exchange (LME) 66À7 London Stock Exchange (LSE) 36, 66À8 long-only funds, concepts 22 LSE see London Stock Exchange mailshots 32 management, risks 57À9 managers see fund managers margins company data 75 futures 60 mark-ups, company data 75 market abuse, concepts 40 market research 47 market risk premium (MRP), CAPM 140À5 market risks, concepts 59, 140À5 market values 75À8, 99À101, 125À7 market-makers 66À8, 80 marketing 14, 27, 31À2, 37, 46, 47À52 costs 27À8, 47À8 methods 31À2, 48 past performance 72 regulations 32, 37, 46 markets concepts 9, 10À11, 36, 66À8, 79À81 data evaluation 75À8, 79À81, 94À5, 98À101, 115À32 INDEX electronic operations 67À8, 74, 89, 107 functions 11, 66 historical background 66 information 76À8, 79À81 ‘open-outcry’ systems 67 operational features 66À8, 74, 89, 94À8, 105À8 physical features 67 players 66À8, 105À7 primary markets 11, 14, 81À3 regulations 66À8 secondary markets 11, 14, 81 settlement procedures 66À8, 89, 106À7 types 9, 11, 14, 66À8, 81 master funds, concepts 22 mathematics see investment mathematics Maxwell, Robert 36, 58 media 32 medium-to-long-term funding see also debt/loan capital; equity capital concepts 11 meetings 112À13 members, financial markets 66À8 mergers and acquisitions funds 111 nominees 92 Panel on Takeovers and Mergers 38, 39 mid-offices, fund management companies 14 Modern Portfolio Theory 139 money, concepts 31À2 money laundering 38À9 money market, concepts 9À10, 11 169 Money Marketing 119 money purchase pension schemes 16À17 money-market instruments concepts 9À11 types 9, 11 money-weighted returns, concepts 125À7 mortgage businesses 15 MRP see market risk premium mutual societies 34 National Criminal Intelligence Service (NCIS) 38 NAV see net asset values NCIS see National Criminal Intelligence Service ‘neither a borrower nor a lender be’ caution 12 net asset values (NAV) concepts 10, 18, 19, 24, 28, 64, 99À101, 120 discounts 10, 18, 24 premiums 10, 18 valuations 99À101 net current assets 75 new issues, shares 81À3 news 58À9, 78À81, 93 Nikkei Stock Average index 135 Nikkei-Dow index 61, 128À9 nil liquidity portfolios, concepts 69 no-load funds 28 nominee companies 15, 91À2 non-executive directors, corporate governance 40 non-UCITS schemes, FSA regulations 33, 62, 64 170 objectives changes 110À11 funds 54À6, 64À5, 110À11 OEICs see Open-Ended Investment Companies Office of Fair Trading (OFT) 38, 39 offshore funds concepts 20À1, 49À50 roll-up funds 50 taxation 20, 49À50 UCITS 20À1, 33, 36À7, 49À50, 62 OFT see Office of Fair Trading OPCVMs, UCITS funds 20À1 open-ended funds see also unit trusts concepts 18À20, 23À4, 30À2, 47À9, 78, 123À7 critique 24, 78 funds flow problems 78, 123 Open-Ended Investment Companies (OEICs) ACDs 19À20, 51, 62À4, 89, 97, 99, 105À6, 108, 113, 118 concepts 18À20, 23À4, 30À3, 49À51, 62À4, 89, 97, 99, 106, 112 conversions 112 corporation tax 97 definition 18À19 depositary 19, 51 dilution levies 19 pricing 19 trends 30 Open-Ended Investment Companies Regulations 2001 19 ‘open-outcry’ systems 67 INDEX operational features, markets 66À8, 74, 89, 94À8, 105À8 options 22, 60À2 see also derivatives order books, company data 75 ordinary shares see also shares concepts 7À9, 83À5 risks/rewards outsourcing see also delegation concepts 105 overheads, company data 75 overweight states, portfolios 69 packaged products, concepts 25 Panel on Takeovers and Mergers 38, 39 partnerships 22 passive management see also tracker funds concepts 54À6, 130 past performance, regulations 72 payment methods, investors 31, 106À7 PE ratio see price/earnings ratio penalties, FSA 28, 44À5, 79, 85 ‘penny shares’ 84 pension funds 3, 15, 16À17, 21, 30À1, 57, 65, 70, 89, 119, 123 see also institutional investors concepts 16À17, 21, 30À1, 65, 89, 123 definition 16 taxation 21, 123 pension plans, associated packaging 25 pension schemes, concepts 16À17 INDEX Pensions Regulator see The Pensions Regulator pensions scandal 36, 58 PEPs see Personal Equity Plans perfect markets see efficient markets performance 30À1, 32À3, 58À9, 72, 73, 75À8, 94À5, 109À10, 115À32, 134À45 absolute performance 127 benchmarking 127À30 categories 117À19 data evaluation 72, 73, 75À8, 94À5, 115À32 indices 127À30, 134À7 measurement 115À32 past performance 72 publications 118À19 relative performance 30À1, 116À19, 127À32 reports 109À10 returns 33, 75, 76, 118À27, 137À45 sector comparisons 30À1, 116À19, 127À32 volatility 130À2, 138À9 yields 76, 119À23 ‘perks’ 10 Personal Equity Plans (PEPs) 25, 30, 92, 106, 112, 123 associated packaging 25 nominees 92 personal funds, concepts physical features, markets 67 placings 81 players, funds 15, 17À33, 104À7 policies, portfolio management 54À6, 110À11 pooled funds, concepts 2À3, 14, 15, 25À6, 56 171 portfolio administration 14, 27, 29, 87À101 accounting and controls 14, 27, 29, 94À5, 110 buying/selling 66À8, 88À9, 105À13 concepts 14, 26À7, 29, 87À101 custodians 15, 26À7, 48, 91, 104À13 delivery requirements 89 income 96À8 profits 96À8 reconciliations 95À6 record-keeping needs 93À4, 96À8 registration functions 26À7, 89À92, 104À5, 108À9 settlement procedures 66À8, 74, 89, 106À7 stock exchange reporting 93 taxation 96À8 transaction processing 14, 94À8, 105À8 portfolio management 14, 27, 53À85 asset allocation 61À2, 65À85, 129À30 chartists 72À4 concepts 53À85 contingencies 78À81 data evaluation 73, 75À8, 79À81, 94À5, 98À101, 115À32 events 58À9, 72À4, 78À81, 93 liquidity 69, 70À1 objectives 54À6 policies 54À6, 110À11 quantitative analysis 72À8 stock selection 65À85, 130, 143À4 172 portfolio management (cont.) strategies 54À6 styles 54À6, 65, 130 weightings 68À9 portfolio risk premium (PRP) 140À5 portfolio yield 120 portfolios 3, 14, 19À20, 53À85, 94À5, 98À101, 115À32, 142À5 see also shares CAPM 142À5 data evaluation 73, 75À8, 79À81, 94À5, 98À101, 115À32 diversified portfolios 24, 29, 56, 58À9, 76À8, 143À5 fully invested portfolios 69 monitoring chores overweight states 69 private portfolios 19À20 profiles 68À9 underweight states 69 valuations 98À101 weightings 68À9 PPE see prospective PE ratio preference shares 7À9 see also shares premiums net asset values 10, 18 risks 140À5 press advertisements 32 Prevention of Fraud (Investments) Acts 35À6 price/earnings ratio (PE ratio) 75À6 prices efficient markets 76À8 shares 72À7, 81À3, 84À5, 117À32 INDEX standard deviation 131À3, 137À45 volatility 130À2, 138À9 pricing see also costs capital 10, 72À8, 81À3, 84À5, 139À45 CAPM 76À8, 139À45 dual-pricing system 28, 99À101 funds 17, 18, 19, 24, 51À2, 98À101 investment trusts 18, 24 market values 75À8, 99À101, 125À7 NAV 99À101 OEICs 19 single-pricing method 19, 99, 101 unit trusts 17 primary markets, concepts 11, 14, 81À3 private portfolios see also segregated funds concepts 19À20 probability density function 138 proceeds, definition 107 Proceeds of Crime Act 38À9 professional management, fund benefits 29À30 profiles, portfolios 68À9 profits, portfolio administration 96À8 programmed trades, phenomenon 74 promotions see also marketing funds 32, 46, 48, 52 property see real estate prospective PE ratio (PPE) 75À6 INDEX prospective yield 119À20 prospectuses 50À1, 99 providers, funds 26À33 proxy votes 112À13 PRP see portfolio risk premium prudence requirements, FSA 64 public offerings 81 qualifying trades, VCTs 21 quantitative analysis, concepts 72À8 quick ratio 75 radio 32 ratios 75À8 re-basing techniques, indices 134À7 real estate 22 reasons, decision-making 65 Recognised Investment Exchange (RIE) 42 reconciliations, records 95À6 record-keeping needs 93À4, 96À8 redemption yield 120À3 registered holders, concepts 90À2 registers see also documentation standards changes 104À5, 108 dates 109 FSA principles 41 holders 26À7, 89À90, 104À5, 108À9 registration functions 26À7, 89À92, 104À5, 108À9 regulated activities, concepts 15, 24, 41 Regulated Activities Order 15 173 regulated products, Financial Services Compensation Scheme 24 regulations 15, 17, 19, 20, 22, 27À8, 32À46, 48À9, 55À6, 62À3, 85, 104À13 see also Financial Services Authority; legislation agents 104À5, 108 breaches 85 categorised funds 33, 117À18 changes 110 churning costs 55 compliance 14, 20, 27À8, 32, 45À6, 48À9, 94À6, 105 delegation 104À5 derivatives 62 disclosures 31À2, 39, 71 gearing 62À3 historical background 34À8 Internet 50 investor protection 33À46, 63À5, 94À6, 105À13 listed companies 39, 93, 106À7 marketing 32, 37, 46 markets 66À8 meetings 113 nominees 92 past performance 72 in practice 42À6 self-regulatory framework 34, 36 valuations 99À100 regulatory bodies 28, 33À46 relative performance, concepts 30À1, 116À19, 127À32 remuneration committees, corporate governance 40 174 reports communications 109À10 performance 109À10 short forms 110 reputations fund managers 58 users of capital 5À6, 9À10 research and development 75 resolutions, meetings 112À13 responsibilities, fund managers 14, 58, 63À5, 104À13 retail market 47À8, 57, 62, 64, 71 return on capital employed (ROCE) 75 returns see also yields annualised returns 123À7 CAPM 76À8, 139À45 concepts 33, 75, 76, 118À27, 137À45 internal rate of return 120 money-weighted returns 125À7 risk adjustments 130À2, 138À45 time-weighted returns 126À7 total returns 76, 118À19, 120À7, 129À30 rewards debt/loan capital 8À9 ordinary shares preference shares 7À8 risks 5À9, 31, 54, 56À7 RIE see Recognised Investment Exchange rights issues 78 risk adjustments 130À2, 138À45 risk assessments, FSA principles 41 INDEX risk management 57À62 see also hedging concepts 57À62 risk profiles, investors 56À7 risk ratings, FSA 42À3 risk-averse suppliers of capital 9À10 risk-free assets 138À9, 140 risks beta coefficient 77À8, 140À5 CAPM 76À8, 139À45 concepts 3À12, 31, 54À62, 64, 79, 130À2, 138À40 debt/loan capital 8À9 diversified portfolios 24, 29, 56, 58À9, 76À8, 143À5 events 58À9, 72À4, 78À81 investors 56À9 ordinary shares preference shares 7À8 premiums 140À5 prudence requirements 64 rewards 5À9, 31, 54, 56À7 spread benefits 29À30, 64À5, 76À8, 143À4 standard deviation 131À3, 137À45 total risk 131À3 types 57À9, 79, 131À3, 143À5 uncertainties 130À2 ROCE see return on capital employed role, funds 13À52 roll-up funds 50 S&P 500 index 61, 128À9, 137 sales, funds 31À2 sales revenue, businesses 4À5 sales/turnover, company data 75 savings 23, 30À1, 97 Savings Directive 97 [...]... as heralded in the introduction, the answer includes banks, brokers, life insurers, pension scheme managers, investment houses, unit trust managers and trustees and, comparatively recently brought within the definition, nominee companies and custodians 1 The Regulated Activities Order is a Statutory Instrument that is varied from time to time 16 AN INTRODUCTION TO FUND MANAGEMENT Types of fund The... investments and, instead of a manager, a board of directors to manage the company Investment management and administration are usually sub-contracted to a specialist fund management company The shares of investment trusts are themselves traded on the stock exchange The price of such shares is, therefore, a function of supply and demand in the stock market and may be at a premium or discount to the underlying... contributions of many individuals are pooled and managed as a single fund Management of the fund is usually taken to refer to the investment management – i.e., the buying and selling of the investments comprising the fund s portfolio, but the fund manager actually takes responsibility for a wide range of activities, and is organised as a business itself, with specialist departments to deal with each... companies are usually organised into front-, mid- and back-offices which deal with the various aspects of the business – namely, marketing, portfolio management, transaction processing, systems support, fund accounting and administration, compliance and corporate management ROLE OF FUNDS 15 Investment businesses Most funds are themselves investments and, therefore, fund management is a ‘designated... 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. .. 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 Chapter 1 INTRODUCTION 2 F AN INTRODUCTION TO FUND MANAGEMENT und 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... 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 INTRODUCTION 11 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 sterlingdenominated instruments, and a variation... 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 imaginary companies, Solid Surething plc and Dodgy Dot Com Ltd 10 AN INTRODUCTION TO FUND MANAGEMENT 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
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