Chapter 3 Christopher Viney Peter Phillips

Chapter 3
Non-bank Financial
Institutions (NBFIs)
Website:
www.apra.gov.au
www.efic.gov.au
Copyright 2012 McGraw-Hill Australia Pty Ltd

PPTs to accompany Financial Institutions, Instruments and Markets 7e by Viney and Phillips 3-1
Slides prepared by Peter Phillips
Learning objectives
• Understand the different types of NBFIs and their roles
in the financial system
– Investment and merchant banks, managed funds, cash
management and public trusts, superannuation funds, life
and general insurance offices, hedge funds, finance
companies and general financiers, building societies and
credit unions, and export finance corporations
• Outline the financial products and services provided by

NBFIs
• Describe NBFIs’ principal sources and uses of funds

Chapter organisation
3.1 Investment and merchant banks
3.2 Managed funds
3.3 Cash management trusts
3.4 Public unit trusts
3.5 Superannuation funds
3.6 Life insurance offices
3.7 General insurance offices
3.8 Hedge funds
3.9 Finance companies and general financiers
3.10 Building societies
3.11 Credit unions
3.12 Export finance corporations
3.13 Summary

3.1 Investment and merchant
banks
• Evolved under regulation
• Are not authorised banks and are officially classified as

‘money market corporations’ in Australia
• Share of total financial institution assets declined from

7.2% in 1990 to 1.4% in 2010
• Today, there is very little difference between a

‘merchant’ bank and an ‘investment’ bank
(cont.
)
banks (cont.)
• Sources of funds
– Mainly securities issued into international money markets
and capital markets
• Uses of funds
– Limited lending to clients, usually on short-term basis
– These loans tend to be sold into the secondary market
– Primarily focused on off-balance-sheet advisory services
(cont.
)
banks (cont.)
• Off-balance-sheet business
– Innovative products and services in provision of advice,

management and funding services, generating their main
income from fees, e.g.:
 FOREX dealers, advice on raising funds, underwriting
equity/debt issues, shares placements, balance-sheet
restructuring, venture capital
 mergers and acquisitions—takeover company seeks to gain

control over a target company
• horizontal, vertical, conglomerate and hostile takeovers
• synergies, economic/legal/accounting/tax considerations
• analysis, valuation, negotiation, due diligence

3.2 Managed Funds
3.8 Hedge funds
3.11 Credit unions
3.13 Summary

3.2 Managed funds
• There has been tremendous growth in the amount of
funds under management
• Despite the financial crisis, funds continue to flow into
Australia’s superannuation funds, which are by far the
largest component of the managed funds sector
• Indeed, between 2008 and 2010, funds under
management in superannuation funds increased by
more than $100 billion
• This increase more than offset the falls (of about $10
billion) experienced in other parts of the sector,
particularly cash management trusts and unit trusts
(cont
)
3.2 Managed funds (cont.)
• Investment vehicle for investing the pooled savings of
individuals in various asset classes in domestic and
international money and capital markets by fund
managers
– Mutual fund (USA)

 Managed funds established under a corporate structure;
investors purchase shares in the fund
– Trust fund (Australia and UK)

 Managed funds established under a trust deed, managed by a
trustee or responsible entity
 Investors in the fund obtain a right to the assets of the fund and
a share of the income and capital gains (losses) derived
(cont.
Copyright 2012 McGraw-Hill Australia Pty Ltd )
• Main categories of managed funds
– Cash management trusts (section 3.3)

– Public unit trusts (section 3.4)
– Superannuation funds (section 3.5)
– Statutory funds of life offices (section 3.6)
– Hedge funds(section 3.8)
– Common funds
 Operated by trustee companies, they pool funds of
beneficiaries and invest in specified asset classes
 Differ from unit trusts in that units are not issued
 E.g. solicitors offering mortgage trusts
(cont.
)
• Main categories of managed funds (cont.)
– Friendly societies
 Mutual organisations that provide members with investment
and other services (insurance, sickness, unemployment
benefits)
 Investment products include the issue of bonds that invest in
asset classes like cash, fixed-interest, equities and property
(cont.
)
• Growth in sector driven by deregulation, affluent and ageing

population, and more educated investors
• Sources of funds
– Funding derived from specific contractual commitments of
investors
 Periodic payments to the fund, e.g. superannuation
 Single payment or premium, e.g. insurance policy
– Total assets $1,600 billion as at December 2010
 More than $1,000 billion managed by superannuation funds
– Funds under management about 35% of all financial institution
assets
(cont.
)
• Uses of funds
– Large funds typically allocate a portion of the total asset

portfolio to several professional fund managers for risk- and
performance-management purposes
– Professional managers invest in asset types authorised
under the trust deed of a particular fund
(cont.
)
• Categorisation of managed funds by investment risk
profile
– Capital guaranteed funds

 Value of contributions guaranteed, but not future earnings
 Investments are low risk, low return, e.g. government and semi-
government securities, bank bills, debentures and cash
deposits
– Capital stable funds

 Contributions are mostly protected by investments in low risk
securities
 Investments as per capital-guaranteed fund plus property
(cont.
)
• Categorisation of managed funds by investment risk
profile (cont.)
– Balanced growth funds

 Investments in longer term income streams supported by
limited capital growth
 Investments include domestic and foreign equities
– Managed growth (or capital growth) funds

 Invest for greater return through capital growth and less
through income streams
 Investments include a greater proportion of domestic and
foreign equities

3.2 Managed funds
3.8 Hedge funds
3.11 Credit unions
3.13 Summary

• A mutual investment fund, often managed by a financial
intermediary, established under a trust deed, specifying
the trust’s investments
• Generally invest in short-term money-market
instruments
• Provide high liquidity for the investor
• Share of total financial institutions assets grew from
0.6% in 1990 to 1.1% in 2008. This declined to 0.8%
following the GFC
• Provide retail investors with access to the wholesale
market
– Cash and deposits 70%, bills of exchange 7%, other assets
23%

3.2 Managed funds
3.8 Hedge funds
3.11 Credit unions
3.13 Summary

• Investment fund established under trust deed
• Investors purchase a share in the trust called a ‘unit’
• The trustee invests the pooled funds received from
investors
• Unit holders receive a return in the form of income and/
or capital gain
• Types of unit trusts and share of public unit trusts
assets:
– Property trusts (44%)
– Equity trusts (47%)
– Mortgage trusts (2%)
– Other (including fixed-interest trusts) (5%)
(cont.
)
3.4 Public unit trusts (cont.)
• Share of total financial institutions assets grown from
3.7% in 1990 to 5.6% in 2010
• Listed trusts
– Units quoted and sold on the ASX (more liquid)—mainly
property trusts
• Unlisted trusts
– Units sold back to trustee after giving the required notice
(less liquid)—mainly equity trusts


Chapter 3 Christopher Viney Peter Phillips

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Copyright 2012 McGraw-Hill Australia Pty Ltd

• Outline the financial products and services provided by

Copyright 2012 McGraw-Hill Australia Pty Ltd

Copyright 2012 McGraw-Hill Australia Pty Ltd

• Are not authorised banks and are officially classified as

• Share of total financial institution assets declined from

• Today, there is very little difference between a

– Innovative products and services in provision of advice,

 mergers and acquisitions—takeover company seeks to gain

Copyright 2012 McGraw-Hill Australia Pty Ltd

Copyright 2012 McGraw-Hill Australia Pty Ltd

– Mutual fund (USA)

– Trust fund (Australia and UK)

– Cash management trusts (section 3.3)

• Main categories of managed funds (cont.)

• Growth in sector driven by deregulation, affluent and ageing

– Large funds typically allocate a portion of the total asset

– Capital guaranteed funds

– Capital stable funds

– Balanced growth funds

– Managed growth (or capital growth) funds

Copyright 2012 McGraw-Hill Australia Pty Ltd

Copyright 2012 McGraw-Hill Australia Pty Ltd

Copyright 2012 McGraw-Hill Australia Pty Ltd

Copyright 2012 McGraw-Hill Australia Pty Ltd

Copyright 2012 McGraw-Hill Australia Pty Ltd

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