Chapter 5: Asset Management - refers to the management of people’s assets involved funds for

individuals, businesses, state and local government entities, endowments and foundations. They
generate income from fees based on the market value of the assets they manage and /or performance
fees. Assets include either intangible or intangible assets.

 Intangible assets are things we cannot touch such as intellectual property, goodwill,
financial assets, or human capital.
 Tangible assets, on the other hand, are things we can touch and include buildings, land,
computers, or office equipment.

 The person in charge of managing other people’s assets is an Asset Manager or Investment
Manager. Their aim, above all, is to make as much profit as possible for their client.

Asset Management Firms invest in bonds, shares, and other assets, depending on their client’s
preferences.

Different Types of Investment Companies

1. Mutual Funds (Open-end)

The most common form of an investment company is a mutual fund. If you have a 401(k), you’re
probably already invested in at least one mutual fund, but you might not know what exactly they are or
what they do.

A mutual fund is an investment vehicle that takes a pool of money collected by investors and uses it to
invest in securities such as stocks or bonds. They are run by professional money managers who make
decisions about what securities to buy or sell and make changes to allocations based on economic and
financial analysis.

Additionally, the value or price of each share of the portfolio, called the net asset value (NAV).

NAV = Market value of portfolio – Liabilities

Number of shares outstanding

2. Mutual Fund (Closed-end)

A closed-end mutual fund has some similarities to the open-end structure but with some key
differences. While open-end mutual funds trade once per day, closed-end funds trade like stocks and
can be bought and sold throughout the trading day. They also only issue a single IPO in order to raise
capital and have a fixed number of shares, whereas an open-end mutual fund constantly takes in new
investors and may have a varying share count.

Both types come with active management, however, closed-end funds are stricter with how they are
run. These types of funds are usually designed for one single purpose and don’t stray as much as open-
end mutual funds. Investments in specific assets like municipals or sectors like utilities are common for
closed-end funds.

3. Unit Investment Trust (UIT)

A unit investment trust (UIT) is a type of Investment Company that, unlike mutual funds, offers investors
a fixed portfolio of stocks and bonds. Investors looking for an investment to hold for a longer period of
time instead of something that can be traded may choose a UIT instead. Investors will be able to collect
interest income from dividends and bonds but will only profit from capital appreciation when the UITs
holdings fully mature.

Fund Sales Charges and Annual Operating Expense (Expense Ratio)

Shareholder Fee / Sales Charges

In general, there are two kinds of sales charges: front-end loads and back-end loads. A front-end load is
a fee paid to purchase an investment, and a back-end load is a fee paid to sell an investment (it may also
be called a contingent deferred sales charge, an exit fee or a redemption charge). A no-load fund is
a mutual fund that does not charge any fees of this type.

Expense Ratio

The expense ratio is the annual fee that all funds or exchange-traded funds charge their shareholders. It
expresses the percentage of assets deducted each fiscal year for fund expenses, including management
fees, administrative fees, operating costs, and all other asset-based costs incurred by the fund.

Types of Funds by Investment Objectives

1. Bond Funds
Ideal for: Low to moderate-risk investors who want to protect their savings against inflation
while earning higher profits than time deposits and money market investments
Where the funds are invested: Fixed-income, long-term securities such as Philippine treasury
notes and other government bonds and corporate bonds
Investment horizon: Medium to long-term (One to three years)
Goal: Capital preservation

2. Equity Funds
Ideal for: High-risk investors with experience in stock market investing who want to maximize
their profits
Where the funds are invested: Shares of stocks listed in the Philippine Stock Exchange
Investment horizon: Long-term (Five years or longer)
Goal: Long-term capital growth
 3. Balanced Funds
Ideal for: Low to moderate-risk investors who want to earn a bit higher profits than bond funds
Where the funds are invested: A mix of shares of stocks and bonds (typically 60% stocks and
40% bonds)
Investment horizon: Medium to long-term (Three to five years)
Goal: Medium to long-term capital growth

4. Money Market Funds

Ideal for: Low-risk investors who want to prevent their money from losing its value while
earning a little higher profit than regular savings or checking accounts and time deposits
Where the funds are invested: Risk-free, short-term securities, including time deposits,
government Treasury bills, and corporate bonds
Investment horizon: Short-term (One year or less)
Goal: Capital preservation

Exchange-traded funds (ETFs)

- Are one of the most important and valuable products created for individual investors in recent
years. ETFs offer many benefits and, if used wisely, is an excellent vehicle to achieve an
investor’s investment goals.
- Briefly, an ETF is a basket of securities that you can buy or sell through a brokerage firm on a
stock exchange. ETFs are offered on virtually every conceivable asset class from traditional
investments to so-called alternative assets like commodities or currencies. In addition,
innovative ETF structures allow investors to short markets, to gain leverage, and to avoid short-
term capital gains taxes.

Hedge Funds

 Is an alternative investment that is designed to protect investment portfolios from market

uncertainty, while generating positive returns in both up and down markets. Throughout time
investors have looked for ways to maximize profits while minimizing risk.

Types of Hedge Funds

1. Equity Market Directional Hedge Funds - The long and short positions partly offset each other,
therefore the overall equity market exposure can be limited (but usually it is not zero). Many
managers analyze financial statements and fundamentals of companies in great detail, but there
are also funds trading based on technical analysis or quantitative models.

2. Corporate Restructuring Hedge Funds - focusing on corporate restructuring trade securities

(mostly stocks and bonds) issued by companies in special situations like distress, bankruptcy, or
merger. The securities are often not publicly traded and there may be a closer relationship
 between the fund manager and the company. Sometimes the fund managers get even actively
involved in the decision making inside the company during the restructuring.

3. Convergence trading Hedge Funds (Arbitrage Hedge Funds) - they buy the relatively
underpriced security and sell the relatively overpriced one. Profit is made when the price
relationship gets back into “normal”.

Pension

 A pension plan is an asset pool that accumulates over an individual’s working years and is
paid out during the nonworking years.

Types of Pension Plans

 Defined-Benefit Pension Plans: a plan where the sponsor promises the employee a specific benefit
when they retire.
 Defined-Contribution Pension Plan: a plan where a set amount is invested for retirement, but the
benefit payout is uncertain. With this plan the employee’s benefits during retirement depend on
the contributions made to and the investment performance of the assets in his or her account,
rather than on the employee’s years of service or earnings history.
 Private Pension Plans: any pension plan set up by employers, groups, or individuals.
 Public Pension Plan: any pension plan set up by a government body for the general public.

 Pension funds are managed by the plan sponsor and/or by asset management firms hired
by the sponsor.
 Chapter 5
Asset Management
Firms
Learning Objectives:

o Definition of Asset Management

o Different Types of Investment Companies
o Fund Sales Charges and Annual Operating Expense (Expense Ratio)
o Types of Investment Objectives
o Exchange-traded funds (ETFs)
o Definition of Hedge Funds
o Different Types of Hedge Funds
o What is Pension
o Types of Pension Plans

Submitted by: Daniela Pangantihon

BSBA FM IV

Submitted to: Mr. Fiel C. Martinez, CPA