Faculty of

Economics
Investment Analysis and
Portfolio Management
Lecturer: Mr. Sayed
Kifayatullah
 Investment Analysis & Chapter Three
Portfolio Management Direct Vs Indirect Investing

Direct Investing

Investors can use direct or indirect type of investing. Direct

investing is realized using financial markets and indirect investing
involves financial intermediaries. The primary difference between
these two types of investing is that applying direct investing
investors buy and sell financial assets and manage individual
investment portfolio themselves. Consequently, investing directly
through financial markets investors take all the risk and their
successful investing depends on their understanding of financial
markets, its fluctuations and on their abilities to analyze and to evaluate
the investments and to manage their investment portfolio.
 Investment Analysis & Chapter Three
Portfolio Management Direct Vs Indirect Investing

Indirect Investing
• Contrary, using indirect type of investing investors are
buying or selling financial instruments of financial
intermediaries (financial institutions) which invest large
pools of funds in the financial markets and hold
portfolios. Indirect investing relieves investors from making
decisions about their portfolio. As shareholders with the
ownership interest in the portfolios managed by financial
institutions (investment companies, pension funds,
insurance companies, commercial banks) the investors are
entitled to their share of dividends, interest and capital
gains generated and pay their share of the institution’s
expenses and portfolio management fee.
 Investment Analysis & Chapter Three
Portfolio Management Direct Vs Indirect Investing

Investment Companies
• Financial firm that sells shares to the public and uses the proceeds
to invest in marketable securities.
• Investment company beside diversification offer professional
management services, and shareholders pay some charges for that.
• An investment company is a company whose main business is
holding securities of other companies purely for investment
purposes. The investment company invests money on behalf of its
shareholders who in turn share in the profits and losses.
• Examples, A.B. Watley Group Inc, Affiliated Managers Group, Inc.,
Allied Capital Corporation, Berkeley Technology, Limited (ADR),
Calamos Asset Management, Inc, Castle Holding Corp, Citigroup
Capital XIV, CME Group Inc etc.
 Investment Analysis & Chapter Three
Portfolio Management Direct Vs Indirect Investing

Types of investment company

• Unit investment trust
• Unit investment trusts (UITs) are registered investment companies that generally purchase a fixed,
unmanaged portfolio of stocks and/or bonds that are preselected by investment professionals to
meet a specific goal (although there is no guarantee the unit trust will meet its objectives).
• Fixed portfolios. The investments within a unit trust are fixed for a predetermined time, which
means the investments do not change unless a company is bought or merged with another
company or a company's financial condition becomes irreparable. Ex, North American Income Trust
(NAIT). JPMorgan American Investment Trust (JAM),
• Its investment is also called passive investment, mean once purchased then not actively traded.
• UITs are sold in units instead of shares (with each unit selling for $1,000), and are only held for a
predetermined length of time as dictated by the trust that governs the portfolio.
• When the portfolio matures, the trust is dissolved, the units are liquidated, and the proceeds are
distributed to the investors, who will realize a taxable gain or loss from the sale of the units.
Although UITs don’t charge ongoing management fees in the manner of actively managed funds,
they often have an initial sales charge that usually runs anywhere from 1% to 5%.
 Investment Analysis & Chapter Three
Portfolio Management Direct Vs Indirect Investing

• Exchange Traded Funds:

• portfolio of assets that offer diversification over a sector, region, or market.
• ETF is investment company, which keep its portfolio of stocks over a sector, region
or market to diversify risk, management fee is comparatively low, and as it not
actively traded that’s why capital gain is realized less.
• Its main advantages over other mutual funds are lower fees and greater tax
efficiency.
• Example: Qubes in NASDAQ stock exchange, Vanguard Total Bond Market
Index.
• One of the most common ETFs is the SPDR, known as the Standard & Poor’s
American Depository Receipt, which invests in the S&P 500 Index Fund. ETFs also
have a wide range of investment objectives. Because these funds do not require
ongoing portfolio management, their fees are lower than those charged by actively
managed funds.
 Investment Analysis & Chapter Three
Portfolio Management Direct Vs Indirect Investing

• The Nasdaq Stock Market, also known as Nasdaq) is an American stock

exchange. It is the second-largest stock exchange in the world by market
capitalization, behind only the New York Stock Exchange located in the
same city. The exchange platform is owned by Nasdaq, Inc. "Nasdaq" was
initially an acronym for the National Association of Securities Dealers
Automated Quotations. It was founded in 1971 by the National
Association of Securities Dealers (NASD),which divested itself of Nasdaq in
a series of sales in 2000 and 2001. The Nasdaq Stock Market is owned and
operated by Nasdaq, Inc., the stock of which was listed on its own
securities exchange on July 2, 2002, under the ticker symbol NDAQ.
 Investment Analysis & Chapter Three
Portfolio Management Direct Vs Indirect Investing

• Closed-end investment companies: No additional shares sold after

initial public offering
– Mean once they issue their securities through IPO(initial public offer), then
there is no additional share sold.
– Closed-end investment company share is not traded by net asset value.
– Net asset value = Market value of portfolio – Liabilities /Numbers of shares
outstanding.
– net asset value (NAV) of the fund is the total market value of the fund’s
securities, plus any other assets, such as cash, minus its liabilities, then
dividing the result by the total number of shares outstanding. EX: Alliance
Bernstein income fund, Aberdeen Asia-pacific income fund.
– The company issues the shares in an IPO similar to stocks, and all the shares
that are purchased then trade on an exchange like a stock.
– Closed-end companies do not assess sales charges of any kind, but investors
must pay a commission to buy or sell them, just like a stock or other security.
 Example on NAV
• An investment firm manages a mutual fund and would like to calculate
the net asset value for a single share. The investment firm is given the
following information regarding its mutual fund:
• Value of securities in portfolio: $75 million (based on end of day
closing prices)
• Cash and cash equivalents of $15 million
• Accrued income for the day of $24 million
• Short-term liabilities of $1 million
• Long-term liabilities of $12 million
• Accrued expense for the day of $5 million
• 20 million shares outstanding
Continue,…
• Interpreting the Net Asset Value
• The net asset value represents a fund’s market value.
When expressed at a per-share value, it represents a
fund’s per unit market value. The per-share value is the
price at which investors can buy or sell fund units.
• When the value of the securities in the fund goes up,
the net asset value goes up. Conversely, when the
value of the securities in the fund goes down, the NAV
goes down:
• If the value of securities in fund increases, then the
NAV of the fund increases.
• If the value of the securities in fund decreases, then
the NAV of the fund decreases.
 Investment Analysis & Chapter Three
Portfolio Management Direct Vs Indirect Investing

• Open-end investment companies: Shares continue to be sold to the public

at NAV after initial sale and its total capitalization changes over additional
issuance.
– Shares may be sold back to company at NAV
– Company size constantly changes
– It is Popularly called mutual funds
Or investment companies that are able to buy and sell an unlimited
number of shares. Shares of open-end investment companies can only be
bought and sold directly from the issuing fund company, and they cannot
be traded in any type of secondary market.
Examples: American Funds, American Century, Pioneer, Franklin, and
Eaton Vance – offer primarily open-end investment companies.
 Investment Analysis & Chapter Three
Portfolio Management Direct Vs Indirect Investing

Insurance Companies
• Insurance Companies are in the business of assuming the
risks of adverse events (such as fires, accidents, etc.) in
exchange for a flow of insurance premiums. Insurance
companies are investing the accumulated funds in securities
(treasury bonds, corporate stocks and bonds), real estate.
Examples: Allied Insurance , Allstate , American Family
Insurance , American Income Life Insurance Company ,
American National Insurance Company
•America Financial Life and Annuity Insurance Company ,
America Mutual Insurance
 Investment Analysis & Chapter Three
Portfolio Management Direct Vs Indirect Investing

Pension Funds
• Pension Funds are an asset pools that
accumulates over an employee’s working
years and pays retirement benefits during
the employee’s nonworking years. Pension
funds are investing the funds according to
a stated set of investment objectives in
securities (treasury bonds, corporate stocks
and bonds), real estate.
 Investment Analysis & Chapter Three
Portfolio Management Direct Vs Indirect Investing

Mutual Fund classification

• A mutual fund is a type of professionally managed collective investment scheme that pools money
from many investors to purchase securities. While there is no legal definition of the term "mutual
fund", it is most commonly applied only to those collective investment vehicles that are
regulated(controlled by rules and laws) and sold to the general public. They are sometimes
referred to as "investment companies" or "registered investment companies." Most mutual funds
are "open-ended," meaning stockholders can buy or sell shares of the fund at any time. Hedge
funds are not considered a type of mutual fund.
• Money Market Mutual Fund: A mutual fund that invest in money market instruments(short term
debt instruments). Example: T-Bills, Commercial paper
• It is divided into:
• Taxable money market funds: Is that mutual fund which keeps a portfolio in money market
security which have average maturity of 90 days. Government charges taxes on these securities.
Eg- money market deposit account
• A money market account (MMA) or money market deposit account (MMDA) is a non financial
account that pays interest based on current interest rates in the money markets. Money market
accounts typically have a relatively high rate of interest and require a higher minimum balance
(anywhere from $1,000 to $10,000 to $25,000) to earn interest or avoid monthly fees.
• Tax-exempt money market funds: Is that mutual fund which Invest in short term municipal
securities(security issued by local government) and must have average maturities of 90 days or
less. Government do not charge taxes on those securities.
EX: Municipal Notes (maturity 12 months or less than)
 Investment Analysis & Chapter Three
Portfolio Management Direct Vs Indirect Investing

•
Mutual Fund Classification
Equity funds: hold primarily stocks, It is further divided to:
– Capital appreciation funds: seek capital appreciation(a mutual fund that
concentrates on making investments whose value grows fast rather than those that
pay high interest or dividends.
– Ex: Fidelity capital appreciation fund
– Total return funds: seek a combination of current income and capital appreciation.
– EX: PIMCO Total Return Fund.
– Zweig Total Return Fund Changes Name To Virtus Global Dividend & Income Fund
Sept. 23, 2016 /PRNewswire/ -- The Zweig Total Return Fund, Inc. will begin trading
under its new name, Virtus Global Dividend & Income Fund Inc., effective September
27, 2016.
• Bond funds: Hold bonds.
– Taxable Bond funds:
– Tax-Exempt Bond Funds:
Capital App fund: As its name suggests, a capital appreciation fund seeks to deliver
value to shareholders by investing in companies with appreciating share prices. This
type of fund is the exact opposite of an income or dividend fund, which focuses on
investing in companies that pay shareholders a dividend.
 Investment Analysis & Chapter Three
Portfolio Management Direct Vs Indirect Investing

International Funds
• International Funds:
– Mutual funds that concentrate primarily on international stocks.
– A mutual fund that can invest in companies located anywhere outside of its investors' country
of residence. Also referred to as a "foreign fund".
– Ex: Mondrian International Equity Fund.
• Global Funds:
– Mutual funds that keep a minimum of 25 percent of their assets in U.S securities.
– Many people confuse an international fund with a global fund. The difference is that a global
fund includes the entire world, while an international fund includes the entire world excluding
the investor's home country.
– EX: Davis Global Fund.
• Single Country Funds:
– Investment companies primarily closed-end funds, concentrating on the securities of a single
country.
– New Jersey-based Glovista Investments LLC, which manages about $1.1 billion, picked
Vietnam as a good place to invest, based on its growth potential.
– Vietnamese companies including food processing firm Masan Group Corp, property
conglomerate Vingroup and Sacombank.
 Investment Analysis & Chapter Three
Portfolio Management Direct Vs Indirect Investing

Hedge Funds
• Hedge funds are unregulated companies that seek to exploit various
market opportunities and thereby(because of that) earn larger returns
than are ordinarily available. For example they may use leverage or
derivative securities or they may invest in illiquid assets, They require a
substantial initial investment from investors and may have restrictions on
how quickly investors can withdraw their funds.
• In finance, leverage (sometimes referred to as gearing in the United
Kingdom and Australia) is any technique to multiply gains and losses.[Most
often it involves buying more of an asset by using borrowed funds, with
the belief that the income from the asset or asset price appreciation will
be more than the cost of borrowing. Almost always this involves the risk
that borrowing costs will be larger than the income from the asset or the
value of the asset will fall, leading to incurred losses.
 Investment Analysis & Chapter Three
Portfolio Management Direct Vs Indirect Investing

• In finance, leverage (sometimes referred to as gearing in the United

Kingdom and Australia) is any technique to multiply gains and losses.[Most
often it involves buying more of an asset by using borrowed funds, with
the belief that the income from the asset or asset price appreciation will
be more than the cost of borrowing. Almost always this involves the risk
that borrowing costs will be larger than the income from the asset or the
value of the asset will fall, leading to incurred losses.
• Short sell: the practice of selling securities or other financial instruments,
with the intention of subsequently repurchasing them at a lower price.
• Examples: Convertible Arbitrage, Emerging Markets, Equity Long Short,
Fixed Income, Fund of Funds, Options Strategy, Statistical Arbitrage, and
Macro.
Investment Analysis & Chapter Three
Portfolio Management Direct Vs Indirect Investing
Investment Analysis & Chapter Three
Portfolio Management Direct Vs Indirect Investing
Investment Analysis & Chapter Three
Portfolio Management Direct Vs Indirect Investing
Investment Analysis & Chapter Three
Portfolio Management Direct Vs Indirect Investing
Investment Analysis & Chapter Three
Portfolio Management Direct Vs Indirect Investing