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Mutual funds and the Institutional environment

Mutual funds and the Institutional environment. Chapter 4: overview of institutional investing and institutions’ role in portfolio selection and management Institutional investors Mutual funds / ETFs / Segregated funds Pension Funds. A. Institutional Investors. Pension funds Endowment funds

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Mutual funds and the Institutional environment

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  1. Mutual funds and the Institutional environment • Chapter 4: overview of institutional investing and institutions’ role in portfolio selection and management • Institutional investors • Mutual funds / ETFs / Segregated funds • Pension Funds

  2. A. Institutional Investors • Pension funds • Endowment funds • Financial institutions, e.g., banks and insurance companies • Large portfolio managers • Mutual Funds, hedge Funds … etc.

  3. Constraints in Portfolio Management • Liquidity • Investment horizon • Limits on country holdings • Limits on sector holdings • Limits on individual firm holdings • Limits on trading strategies • Limits on credit quality • ESG

  4. B. Mutual Funds Major categories: • Money market funds • Equity funds (market cap, style, sector) • Fixed-income funds • Income funds • Balanced funds • Asset allocation funds • Index funds

  5. Net Asset Value • Used as basis for valuation of mutual fund shares • Calculation (once per day):

  6. Open-End vs. Closed-End Funds Shares Outstanding • Closed-end • no change unless new shares are offered • Traded on stock exchanges or OTC • Open-end • changes when new shares are sold or old shares are redeemed Pricing • Open-end: net asset value (NAV) • Closed-end: premium or discount to NAV

  7. Costs of Investing in Mutual Funds • Sales charges • Front-end load (%, pay when purchase) • Back-end load (%, pay when redeem) • Typically declines with the holding period • No load (early redemption fee may be charged) • Operating expenses • Management expense ratio (MER) • Expressed as a percentage of total assets

  8. Exchange-Traded Funds • Since 1993 • ETFs, iShares, iUnits • Most are passive • Compare MER with that of index funds • Broad index as well as specialized ETFs: Fixed income, sector, international, style, leveraged • New active varieties (http://www.hapetfs.com) • Traded on NYSE Arca (US) and TSX (Canadian)

  9. ETFs • ETFs are different from closed-end mutual funds • # of shares outstanding changes daily. ETF manager issues and redeems shares to keep the ETF in line with the value of the underlying index (for passive ETFs) or portfolio (for active ETFs) • Ownernship (Institutional/Retail): U.S. (50/50), Europe (90/10) • Leveraged ETFs • Introduced in mid-2006 • See separate set of slides

  10. Pension Plans • Two major types of pension plan • DB • DC (In the U.S., 401(k) plans) • Hybrid • Who bears the risk in each type?

  11. Pension Funds as Institutional Investors Investment of pension assets • All bonds (to “match” liabilities) • Stocks and bonds (traditional: 60%, 40%) • Stocks and bonds + alternative assets • A pioneer: British Rail Pension Plan in the 70s invested in a portfolio of art • More generally: real estate, infrastructure, private equity, 130/30, hedge funds

  12. Ontario Teachers’ Pension Plan (OTPP) • In 1990, the fund's $19 billion of assets were all in Ontario government bonds • $108 on December 31, 2007 • $87.4 on December 31, 2008 • $96.4 on December 31, 2009 • 289,000 plan members • Manage some of its own assets • Active in derivatives/hedge funds • Has its own private capital division • Largest professional single pension plan in Canada

  13. OTPP: Stock versus Flow From 2008 annual report: Stock: • Net assets $87.4 billion Flow: • Investment income ($19 billion)   • Benefits paid $4.2 billion   • Annual contributions* $2.3 billion  *Plan members (teachers) and the Ontario government

  14. CPPIB • Incorporated as a federal crown corporation in 1997 • Investments began in 1999. Before: 100% provincial bonds • Largest pension fund in Canada • $127.7 billion (June 30, 2008) • $108.9 billion (December 31, 2008) • $129.7 billion (June 30, 2010) • 17 million plan members • http://www.cppib.ca

  15. CPPIB • What types of assets are held? Allocation?

  16. Responsible Investing Policy • A non-financial factor/policy • Example • Norwegian Government Pension Fund does not invest in: • Walmart (human rights issues) • Boeing, Honeywell International (nuclear weapon-related business) • Freeport McMoRan Cooper and Gold (environmental damages)

  17. Responsible Investing Policy • McLean Budden’s non-financial screen for their “Select” family of funds • Exclude companies with more than 10% of their gross annual revenue from the sale of tobacco, alcohol, gambling facilities, pornography, and armaments.

  18. CPPIB “ CPPIB has committed to build an engagement capability and use its ownership positions in companies to encourage improved performance in and disclosure of environmental, social, and governance factors ” • Example of “engagement activity”: Burma. In discussion with Senior Execs at Ivanhoe mines

  19. Both CPPIB and OTPP • Investment belief: Artificial constraints decrease returns and/or increase risk over time • Hence, they do not screen stocks based on non-financial criteria alone • Believe that engagement is a more effective approach

  20. Global perspective on size • Largest fund in Canada • Caisse de depot et placement du Quebec: December 31, 2009: $131.6 billion • Largest in North America • CALPERS: July 31, 2010: US$207.3 billion • Largest in the world • Japan Government Pension Investment Fund December 31, 2009: US$1.4 trillion

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