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1. PROFESSIONAL ASSET MANAGEMENT Presented by Dr. Suresh Vadde Mekelle University, Ethiopia

2. Contents Asset Management The Asset Management Industry: Structure And Evolution Private Management And Advisory Firms Investment Fund Companies Services of Investment Companies Management of Investment Companies Valuing Investment Company Shares Types of Investment Companies Closed-end Investment Company Open-end Investment Company Mutual Fund Costs Types of Investment Companies Based on Portfolio Objectives Global Investment Companies Ethics and Regulation in the Professional Asset Management Industry The Code of Ethics and Standards of Professional Conduct

3. Asset Management The management of a client's investments by a financial services company. Asset management is a process whereby a business manages assets as a way of maximizing financial return.  An asset management firm that invests the pooled funds of retail investors in securities in line with the stated investment objectives. For a fee, the investment company provides more diversification, liquidity, and professional management consulting service than is normally available to individual investors.

4. At the end of 2009, the value of assets professionally managed in the world totaled €36.5 trillion. Out of which €12.4 trillion was managed in Europe, €3.8 trillion in the UK, €2.8 trillion in France, and €1.5 trillion in Germany. In relation to aggregate European GDP, total assets under management reached 97% at the end of 2009. These figures highlight the essential role taken by asset management in the investment of society’s long-term savings.

5. Rank Asset Management Company Country Assets under management ( US$bn ) 1 Black Rock Inc. US $3,560 2 UBS Switzerland $2,280 3 Allianz Group Germany $2,213 4 Vanguard Group Inc. US $2,080 5 State Street Global Advisors (SSGA) US $1,908 6 PIMCO (Pacific Investment Management Company) US $1,820 7 Fidelity Investments US $1,576 8 Deutsche Bank Germany $1,433 9 AXA Group France $1,393 10 J.P. Morgan Asset Management US $1,347 Top 10 Asset Management Companies as of June 30, 2012

6. The Asset Management Industry: Structure and Evolution There are two ways in which professional asset management firms are organized. Private Management and Advisory Firms Investment Fund Companies

7. I-Private Management and Advisory Firms These services can range from providing standard banking transactions (savings accounts, personal loans). Advising clients on structuring their own portfolios to managing the investment funds. Relationship with client. Each client of the management firm has a separate account. Assets under management (AUM)

8. II-Investment Fund Companies An investment company is a trust, corporation or partnership that primarily invests the funds pooled from the shareholders in the financial securities such as stocks and bonds. The investment companies are those, which hold financial securities of the other companies. The total market value of all investments divided by the number of fund shares outstanding is the net asset value (NAV). Portfolio management is handled by an investment management company.

9. Flow of Funds in the Financial System

10. Services of Investment Companies Administration & record keeping Diversification & divisibility Professional management Reduced transaction costs

11. MANAGEMENT OF INVESTMENT COMPANIES The management of the portfolio of securities and most of the other administrative duties are handled by a separate investment management company hired by the board of directors of the investment company. Subsequently, this board of directors hires the investment advisory firm as the fund’s portfolio manager. The contract between the investment company (the portfolio of securities) and the investment management company indicates the duties and compensation of the management company. The major duties of the investment management company includes Investment research, The management of the portfolio, Administrative duties, such as issuing securities and handling redemptions and dividends.

12. VALUING INVESTMENT COMPANY SHARES NAV is used as a basis for valuation of investment company shares. Net asset value (NAV) represents a fund's per share market value. This is the price at which investors buy ("bid price") fund shares from a fund company and sell them ("redemption price") to a fund company. NAV computation is undertaken once at the end of each trading day based on the closing market prices of the portfolio's securities.

13. NAV = (Market Value of All Securities Held by Fund + Cash and Equivalent Holdings - Fund Liabilities) / Total Fund Shares Outstanding Example:- At the close of trading yesterday that a particular mutual fund held $10,500,000 worth of securities, $2,000,000 of cash, and $500,000 of liabilities. If the fund had 1,000,000 shares outstanding, then yesterday's NAV would be: NAV = ($10,500,000 + $2,000,000 - $500,000) / 1,000,000 = $12.00 A fund's NAV will change daily as the value of a fund's securities, cash held, liabilities, and the number of shares outstanding fluctuate. Net asset values are like stock prices in that they measure the value of one share of a fund. Also, they give investors a way to compare a fund's performance with market or industry benchmarks (such as the Standard & Poor's 500 or an industry index).

14. TYPES OF INVESTMENT COMPANIES There are two types of investment companies: Closed-end Investment Company Open-end Investment Company

15. Closed-end Investment Company Closed-end investment company do not continuously offer their shares to the public for sale. Rather, they sell a fixed number of shares at one time (in an initial public offering), after which the shares typically trade on a secondary market. The market value of the shares will be based upon supply and demand, much like other securities and not by net asset value. The investment portfolios are managed by separate entities known as "investment advisers" that are registered with the Securities Exchange Board. The funds usually invest in hundreds of companies, so they offer good diversification in certain areas. There is no minimum number of shares to buy, and selling the funds is very easy and quick. When purchasing a closed-end fund, you are typically charged the usual brokerage commission as well as an annual management fee, usually under 1%.

16. Open-end Investment Company A mutual fund is a company that pools money from its investors and then invests the money in stocks, bonds, money markets or other types of securities that are outlined in the company's prospectus. Investors can buy or redeem (sell) shares directly through the investment company. The price of a share in an open-end fund will fluctuate daily, depending upon the performance of the securities held by the fund. Benefits of open-end funds include diversification and professional money management. Open-end funds are more flexible and liquid, many funds allow the transfer or exchange among fund families without fees.

17. MUTUAL FUND COSTS Load versus no-load: Load funds have a sales force and the shareholders have to pay a sales charge . Load funds charge sales commission up to 8.5% of NAV. There are a couple different types of load funds out there. Back-end loads mean the fee is charged when you sale the mutual fund. Front-end loads mean the fee is charged when you purchase the mutual fund. A no-load fund simply means that you can buy and redeem the mutual fund units/shares at any time without a commission or sales charge. However, some companies such as banks and broker-dealers may charge their own fees for the sale and redemption of third-party mutual funds. In addition, practically all load funds charge annual distribution fees, also referred to as 12b-1 fees , which are used to pay advertising, brokers’ commissions, and general marketing expenses. These costs vary from 0.25 to 0.75 percent of annual asset value. Some no-load funds also charge 12b-1 fees.

18. Types of Investment Companies Based on Portfolio Objectives

19. I- Common stock funds A mutual fund that invests in the common stock of numerous publicly traded companies. Common stock funds provide investment diversification and offer time savings over researching, buying and selling individual stocks. Within common stock funds, wide differences are found in emphasis, including funds that focus on growth companies, small-cap stocks, companies in specific industries or even geographic areas etc. A common stock fund may be high-risk if it invests primarily in start-ups and recent IPOs, or it may be low-risk if it invests in established companies with stable returns.

20. II- Balanced funds (Hybrid Funds) A balanced fund is geared toward investors who are looking for a mixture of safety, income and modest capital appreciation. The purpose of balanced funds (also sometimes called hybrid funds) is to provide investors with a single mutual fund that combines both growth and income objectives, by investing in both stocks (for growth) and bonds (for income). Such diversified holdings ensure that these funds will manage downturns in the stock market without too much of a loss; Flexible portfolio (or asset allocation) funds seek high total returns by investing in a mix of stocks, bonds, and money-market securities.

21. III- Bond Funds Bond funds concentrate on various types of bonds to generate high current income with minimal risk. They are similar to common stock funds; however, their investment policies differ. Some funds concentrate on U.S. government or high-grade corporate bonds, others hold a mixture of investment-grade bonds, and some concentrate on high-yield (junk) bonds. Municipal Bond Funds provide investors with monthly interest payments that are exempt from federal income taxes. To avoid the state tax, some municipal bond funds concentrate on bonds from specific states, such as the New York Municipal Bond Fund, which allows New York residents to avoid most state taxes on the interest income.

22. IV- Money Market Funds Money market funds were initiated during 1973 when short-term interest rates were at record levels. These funds attempt to provide current income, safety of principal, and liquidity by investing in diversified portfolios of short-term securities, such as Treasury bills, banker certificates of deposit, bank acceptances, and commercial paper. They typically are no-load funds and impose no penalty for early withdrawal. Also, they generally allow holders to write checks against their account.

23. The United States has the World’s Largest Mutual Fund Market Percentage of total net assets, year-end 2011 Sources: Investment Company Institute, European Fund and Asset Management Association, and other national mutual fund associations

24. GLOBAL INVESTMENT COMPANIES Global diversification of investment portfolio include either international funds or global funds. International funds: It includes only non-U.S. stocks from such countries as Germany, Japan, Singapore, and Korea. Funds that invest in non-U.S. securities are generally called as foreign funds. Global funds: It contains both U.S. and non-U-S. securities. Ideally, a global fund should invest in a large number of countries. Both international and global funds fall into familiar categories: Money funds, long-term government and corporate bond funds, and equity funds. In turn, an international equity fund might limit its focus to a segment of the non-U.S. market, such as the European Fund or Pacific Basin Fund, or to a single country, such as Germany, Italy, Japan, or Korea.

25. Ethics and Regulation in the Professional Asset Management Industry A primary intention of the regulations is to guarantee that investment companies keep accurate and detailed transaction records and that account information is reported to investors in a fair and timely manner. Because… Investor is hired to perform a service. Asset management industry is based on handling someone else’s money. It is heavily regulated to ensure a minimum level of acceptable practice.

26. Following are the Principal Securities Laws for the Asset management industry and their primary target user: Securities Act of 1933 for security issuers. Securities Exchange Act of 1934 for security brokers. Investment Company Act of 1940 for mutual funds. Investment Adviser Act of 1940 for advisors and private managers. Employee Retirement Income Security Act 1974 (ERISA) for retirement asset managers. Pension Protection Act of 2006 for pension fund sponsors and managers.

27. The Code of Ethics and Standards of Professional Conduct The Association for Investment Management and Research (AIMR) has developed for its worldwide membership of security analysts and money managers a rigorous Code of Ethics and Standards of Professional Conduct based on these following principles. Act with integrity, competence, dignity, and in an ethical manner when dealing with the public, clients, prospects, employers, employees, and fellow members. Practice and encourage others to practice in a professional and ethical manner that will reflect credit on members and their profession. Strive to maintain and improve their competence and the competence of others in the profession. Use reasonable care and exercise independent professional judgment.

28. By Dr. Suresh Vadde Dept’ of AcFn Mekelle University