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Slide 4.1

Investments

Chapter 4: Institutional Investors

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Slide 4.2

Institutionalization: IInstitutional investors’ relative holdings of US equities have been increasing over the years (as in all OECD countries):

Exhibit 4.1 Institutional holdings of corporate equities in the USA (end of year, in billions of dollars)Source: Federal Reserve Board “Flow of Funds”, www.federalreserve.gov.

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Slide 4.3

Institutionalization: II

Several economic, demographic, and regulatory reasons:

1. Institutional investors can achieve economiesof scale.

2. Demographic pressure on social security.3.The changing role of banks (a key determinant

in the US being regulation Q). Regulation Q imposes a ceiling on the deposit rates that banks

could pay to their clients, so that stability in the banking sector is

secured.

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Slide 4.4

Insurance Companies: I

Insurance companies are in the business of assuming the risks of adverse events (such as fires, floods, accidents, etc.) in exchange for a flow of insurance premiums.

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Slide 4.5

Insurance Companies: II Three Types of Insurance

1. Life insurance.

2. Non-life insurance (also known as property-casualty insurance).

3. Re-insurance.

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Slide 4.6

Pension Funds: I

An asset pool that accumulates over an employee’s working years and pays retirement benefits during the employee’s nonworking years.

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Slide 4.7

Pension Funds: IIThree distinctions to make:

Distinction 2

Pay-as-you-go system Advanced-funded system

Distinction 3

Defined-benefit plan Defined-contribution plan

Distinction 1

State pension plan Private pension plan

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Slide 4.8

Investment Companies: I

An organization that pools investors’ money and invests it in securities according to a stated set of investment objectives (also known as a trust company).

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Slide 4.9

Investment Companies: II

Investment companies run three basic types of funds:

1. Open-end funds (mutual funds).

2. Closed-end funds (investment trusts).

3. Hedge funds.

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Slide 4.10

Open-End Funds

• Have no pre-determined amount of stocks outstanding. They can buy back or issue new shares at any point.

• Price not determined by demand for the fund, but by an estimate of the current market value of the fund’s net assets per share (NAV) and a commission.

• This commission can be added to the NAV as a load (sales commission) or treated as part of the ongoing expenses and included in the NAV (no-load mutual funds).

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Slide 4.11

Closed-End Funds

• A publicly traded investment company that has issued a specified number of shares and can only issue additional shares through a new public issue.

• Pricing of closed-end funds is different from the pricing of open-end funds: the market price can differ from the NAV (know as the discount).

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Slide 4.12

Closed-End Funds

The discount

Assume a fund is traded at P = €15; Assume also that its NAV is €16; In that case the fund’s discount is:

(15 – 16) / 16 = - 6.25%

Most of closed-end funds trade at discount.

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Slide 4.13

Hedge Funds

• A private unadvertised investment partnership, limited to institutions and high-net-worth individuals, that takes concentrated speculative positions.

• Because of these concentrated speculative positions, hedge funds can be very risky.

• Long Term Capital Management…