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BAF3009 Financial Institutions & Markets Tutorial 10

TUTORIAL 10: INVESTMENT & ASSET MANAGEMENT COMPANIES

Question 1
a) Explain the main features of a unit trust.

Main feature of a unit trust:


• Pools the funds of investors together to invest in a diversified portfolio of
securities (e.g. bonds and shares) through a professional fund manager
• A tripartite arrangement among the investors, fund manager and the trustee
• The unit trust is governed by a trust deed that list down the rights, duties and
responsibilities of each party involved in the agreement

b) Describe any 4 differences between a closed-end fund and an open-end fund.

Open vs. Closed-end fund

Open-end fund Closed-end fund


Basic capitalization is not limited Funds can only be raise once with a
– investor can keep putting in fixed number of units.
funds by selling as many units as
they like.
Prices are determined by the Prices are determined by demand
fund’s Net Asset Value (NAV). and supply of shares.
Cannot be traded on organized Buyers and sellers trade with each
exchanges. Buyers and sellers other in organized exchanges after
trade directly with the fund the IPO.
manager.
Bid and Offer price are quoted Bid and Offer price are quoted by
by fund manager. buyer and seller respectively.
Prices traded are based on Prices traded are based on the
prices calculated at end of the matched by Bid and Offer prices
business day by fund manager. between buyers and sellers.
Fund manager must purchase The number of selling units depends
units, hence it results to greater on the availability of the buyer –
liquidity. may be less liquid.

Question 2

“And it is not without reason that the popularity of unit trusts has increased in the past five
years or so. Here’s why: There is a better chance of you picking a positive yielding unit
trust than of you picking a winning stock.”
(Extracted from The Straits Times 28 May 2005)

List four advantages of investing in a unit trust instead of investing directly in the share
market.

1. Small capital requirements


• Investors may start with a smaller capital for unit trust as compared to that
required for direct investment in the capital markets
• In comparisons, the typical minimum sum that professional fund managers
would require in order to manage an individual investment account is $1million.

Investment & Asset Management Companies 1


BAF3009 Financial Institutions & Markets Tutorial 10

2. Professional Managers
• the fund managers have the knowledge, skills and access to timely information
and updated research on economic industry and company trends to manage a
portfolio of various types of investments

3. Diversification of risk
• funds are typically invested in a variety of financial instruments across
geographical region which ensures that their performances are not solely
depended on a single security

4. Liquidity/Marketability of units
• units are fully marketable since the fund managers are obliged to sell and re-
purchase the units

• In contrast, shares and bonds can only be traded when there is a match in price
and volume between ready buyers and sellers.

5. Investors are freed of administrative details.

6. An investor who wants to invest in an “index” portfolio can select


“index” funds that track a broad market index.

7. There is a wide variety of funds to meet the varied need of investors.

Question 3

Sandra is planning to invest in a unit trust and approaches you for advice. She would like
to know more about investing in unit trust.

(a) List the different types of unit trust.

1. Capital growth funds


2. Income funds
3. Balanced funds
4. Geographical funds
5. Sector or theme funds
6. Guarantee features

(b) Elaborate on the factors she needs to consider when selecting the fund.

1. Risk profile - risk taking vs. risk adverse


2. Desired rate of return – return maximization vs. stable, regular
income
3. Preference between asset classes – fixed income, equity,
derivatives and cash (this is tied to desired return from investing
in unit trusts)
4. Preference of geographical concentration – single country,
regional or global
5. Preference of specific sector/theme

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BAF3009 Financial Institutions & Markets Tutorial 10

Question 4

Refer to the article:

“The Aviator of Wealth Management” - Business Times dated 19 August 2006

(a) Which are the major regions (and key markets) for the greatest growth in wealth
management? What is the estimated sum and number of US$ millionaires?

Major Regions/Key markets


Middle East and Asia-Pacific, China, India, South Korea, Indonesia, hong Kong,
Singapore, Saudi Arabia and UAE.

(b) What are the historical reasons and current factors that the article mentioned are
favourable conditions for Singapore to be a global wealth management hub?

Historical/Current factors:
• Historic trade between Middle East and Asia since first millennium AD,
Europeans came in only 15th century.
• Current factors: Include pro-active MAS, good regulatory framework
that is conductive to the industry, well-established and legal British laws
and international accounting standards, excellent IT and physical
infrastructure and good quality of life.

(c) Do you agree with the article’s profiling of the key wealth creators? Why or why
not?

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