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Emirates Bank

Al Shaheen Club

Investments Training September 2008


Vinod J. Bhatia

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Contents

• Part 1 – Basic Investment Principles

• Part 2 – Customer Profiling

• Part 3 – Investment Sales Process and


Documentation

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Part 1
Basic Investment Principles

3
Contents

• Basics of Investing

• Risk Vs. Return

• Asset Classes

• Asset Allocation

• Islamic Investments

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Basics of Investing

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Basics of Investing

• Savings vs. Investing


- Savings – short term to meet immediate requirements.
Defined tenor.
- Investing – longer term in nature. Goals are defined.
Liquidity need is lower.

• Why would a customer invest / investment Objectives?


- Time value of money – beat inflation
- Meeting goals – retirement, house, children’s education
- Preserve capital
- Higher return targets
- Tax savings

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Objectives Vs. Constraints

• Objectives – they are the reasons for investment


- Could be apparent / stated – for example retirement,
housing.
- Could be hidden – Accumulation of wealth to gift to family
members.
- Could be unknown – Medical emergencies, job insecurity.

• Constraints - challenges faced by the client’s portfolio due to


controllable / uncontrollable conditions.
- For example heavy mortgage payment is a constraint to
liquidity; old age is a constraint on the ability to take risk or
invest in very long term assets

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Risk vs. Return

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Investment Risk vs. Investment Return

•Risk – It is defined as the uncertainty in getting


returns (or capital) on an investment.

•Returns – the reward for taking risk i.e, profits,


income, dividends

For example – A trader dealing in commodities takes risk on his


investment in his stock. The prices may fall. Alternatively if the price
rises, the profit (returns) he makes on the sale is his reward for
taking risk.

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Asset Classes

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Different Types of Asset Classes

• Cash / Cash Equivalent – mainly short term in nature, highly liquid. Example Call /
Fixed deposits, Money Market mutual funds, Call Money

• Bonds / Fixed Income – medium to long term in nature, less liquid than cash / cash
equivalent. Example corporate bonds, debentures, government securities, deep
discount bonds, bond funds, etc.

• Property – medium to long term in nature, very low liquidity, many a times
involves large investments. Developed / undeveloped; agricultural, commercial,
residential, REIT.

• Equity/Stocks – medium to long term in nature, fairly liquid but liquidity varies for
individual stocks, volatility in price is very high. Examples are individual stocks
and different category of mutual funds based on nature of investment &
diversification.

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Different Types of Asset Classes

• Hedge Funds/Alternative Strategies – different from equity mutual funds, medium to


long term in nature, fairly liquid but liquidity varies for individual fund, volatility in
price is very high. The fund strives to deliver positive returns for all market
situations.

• Commodities – Example - metals (copper, aluminum), precious metals (gold,


silver), oil, etc. Gold is one of the most preferred commodities for investments.
Commodity mutual funds are available for investors.

Note : An Investor’s portfolio, a mutual fund product or a structured product can


consist of a single asset class or a mix of asset classes.

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Asset Allocation

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Asset Allocation

• Definition - the process by which the wealth / investible wealth of


an investor is distributed over various asset classes in order to
• Achieve consistent returns keeping in mind the objectives
and the constraints of the investor
• Diversify risk

• Allocation factors –
• ability to handle risks.
• how long the investor plans to hold your investments.
• how much money is to be invested?
• investor goals are very important.

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Your Portfolio

For the More Adventurous

Stocks
Commodities

d
ar
Currencies
ew Speciality Funds
R
Technology ; HealthCare; Hedge
Thematic ; Bio tech ; Energy etc.
&
k
is

Global / Regional Funds


R

American; European; Asia; Asia-Pacific;


Japan; Far East; Global

Core Inv
Fixed Income Investments

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Global Investment Strategies Growth Portfolios

V-Factor

Increase Risk Reduce Risk


Reduce Diversification Increase Diversification

As the Market Goes Down: As the Market Goes Up:


•Become More Aggressive •Become More Conservative
•Increase Portfolio Risk (beta) •Reduce Portfolio Risk (beta)
•Reduce Portfolio Diversification (R2) •Increase Portfolio Diversification (R2)
•Add to Positions in Favored Stocks •Reduce or Sell Fully Valued Stocks

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Critical Q’s

Time Horizon
?

Goals Risk
? Tolerance
?

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Critical Q’s To Ask Yourself

• Time horizon for the portfolio as a whole.

• Degree of volatility or value impairment the investor can


withstand; aggregate and for specific investment
categories.

• Desired extent of principal versus purchasing power


protection.

• Role and amount of core and non-core asset classes.

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Critical Q’s To Ask Yourself

• Degree of patience and conviction that can be maintained


in the face of overall portfolio underperformance relative
to the performance of one or two asset classes; and, not
to be minimised.

• Investor’s confidence level in the specific return, risk, and


correlation projections on which asset allocation
decisions are based.

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Rule of thumb is that the younger you are, the more
aggressive you can be with your investment decisions….

because, your investments will have a longer time to


possibly recover from the normal ups and downs of the
market or smoothen a bumpy ride over time

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Asset Allocation & Risk Diversification

• Asset Allocation results in investments being spread across


various asset classes

• These asset classes have different correlation between


themselves – an asset class may or may not perform in the same
manner as another during a given period.

• For example over the last few years Gold has given high returns
whereas the same investment in bonds would have performed
less.

• Hence within a portfolio there would always be some


investments that would be performing better than the others

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Asset Allocation & Risk Diversification

• This results in the portfolio performance remaining in a more


predictable / controllable range and hence risk diversification

Want a smoother ride….diversify, diversify,


diversify…..

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Interest and Dividend Reinvestment

• This concept is one of the most important, yet least appreciated, aspects
of investing in specific asset classes.

• Attention must be paid to the necessity, the consequences, and the


challenges of investing coupon payments or dividends at sufficiently
high rates of return.

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Spending Vs Reinvestment

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Mutual Funds

• Definition - A mutual fund is an investment company that pools


money from share holders and invests in a portfolio of
securities.

• Payout -
Income Distribution : pay-out from the income earned from investments.
Example – dividends and interest
Capital-gain investment : pay-out from profits from the sale of the
investments.

• Types of Mutual Funds - Bond, Stock, Money market and Focused


Funds

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Benefits of Mutual Funds

• Diversification - main reason for investing in mutual funds.


Mutual funds hold a wide variety of securities, reducing
exposure to the risks of individual securities.

• Choice – within the broad categories of stock, bond and money


market funds, investors are able to choose amongst a variety of
investment approaches depending on your risk appetite and
financial goals.

• Liquidity - mutual fund shares are liquid investments that can be


sold on any business day. Mutual funds are required by law to
buy, or redeem, shares each business day.

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Benefits of Mutual Funds

• Professional Management

• Financial safety - mutual funds are highly regulated by the


regulatory institutions such as the U.S. Securities and Exchange
Commission (SEC) and U.K. Financial Services Authority (FSA)

• Fees – can be in the form of:


Annual management fee : charged annually on the outstanding
assets
Initial subscription fee : charged upfront as an entry fee
Other charges / fee : administration, redemption charges,
performance fee

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Mutual Funds – Equity

Based on size of the companies


invested in

Based on geographical regions


&/or markets

Based on sectors / themes & specific


conditions

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Based on size of the companies invested in

Large Cap. - investing only in large companies satisfying


a certain minimum size / market capitalization
criteria

Mid Cap. - Investing in mid size companies

Small Cap. - Investing in small companies, below a


certain specified size.

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Based on Geographical Regions &/or Markets

US Equities
European Equities
Eastern Europe Equities
Latin America
Asia Pacific
Asia Pacific Ex-Japan
Emerging Markets
Asian Tigers
Turkey
Japan
Nordic

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Based on Sectors/Themes &Specific Conditions

Healthcare Funds
Technology Funds
Telecom Funds
Blue-chip Funds
Islamic Fund
Ethical Funds
Consumer Goods Funds

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Hedge Funds / Alternative Investments

• Some recent definitions of hedge funds (are these a myth?)

• Hedge funds are speculative funds managing investments for private


investors
• Hedge funds are speculative funds which make large bets on market
movements
• Investment vehicles that attempt to make above-average returns.
Often bet on currency markets or mergers and acquisitions.
• A fund which is allowed to use aggressive strategies that are
unavailable to mutual funds, including selling short, leverage,
programme trading, swaps, arbitrage and derivatives
• These are funds usually used by wealthy investors or institutions.
Hedge funds are restricted by law to no more than 100 investors; the
minimum contribution is typically USD 1 Million.
Source: Gulf News

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Hedge Funds / Alternative Investments

• A more sensible definition

• A hedge fund is a fund that can take both long and short positions,
use arbitrage, buy and sell undervalue securities, trade options or
bonds, and invest in almost any opportunity in any market where it
foresees gains at reduced risk. The primary aim of most hedge
funds is to reduce volatility and risk while attempting to preserve
capital and deliver positive returns under all market conditions.

Source: Howard Smith, QIM Asset Managers; through Sean Kelleher and Gulf News

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Hedge Funds/Alternative Strategies

• A fund where the primary objective is to achieve absolute positive


returns.
• Quantitative Strategies - Long / Short; Dividend Recapture;
Growth
• Arbitrage / Relative Value - Cash / Futures; Convertible
Arbitrage; Index Reconstitution
• Event Driven - Distressed Securities; Merger Arbitrage

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Capital Guaranteed Investments /
Capital Protected Products

• These are structured products offering the investor capital


protection, with or without a guaranteed coupon and /or an
upside potential.

• Capital Protected (CP) products linked to e.g. hedge funds offer


investors the opportunity of obtaining exposure to alternative
assets whilst immediately taking away the risk of falling foul of
adverse market-timing and potential loss of the initial
investment

• Once the structure has been put in place, then the capital is
guaranteed and will not change irrespective of variations in
interest rates, volatility, rise of the asset value etc.

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Capital Guaranteed Investments / Capital
Protected Products

• The investment is usually not liquid. That is to say that the


performance and guarantee terms are only relevant at maturity
of the investment, and the investment must be held for its full
term to realise the return structure. Penalty fees may be charged
for early / premature redemption

• Are capital guaranteed investments a good idea?


Yes
• Big name protection for boutique managers
• Wrappers for complex products
But
• No free lunch
• Costs - in & out
• Understanding - guarantee or protection?

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Product Range

V Low Low Low/Med Medium Med/High High V High


Risk Risk Risk Risk Risk Risk Risk

Equity Linked
Protected Note D Islamic E B
Global Cert

FX Linked D Islamic E B
Protected Note USA Cert

Arab Income D Islamic E B Emirates


Commodity Linked
Fund Europe Cert Gateway Fund
Protected Note
Structured Emirates Real D Islamic E B
Deposit Dynamic Estate Fund Asia Pac Cert
Special Liquidity Fund
Deposit Range Conservative Balanced Active Arab Gateway
Cash Plus
Accruals Managed Managed Managed Fund
Portfolio

V Low Low Low/Med Medium Med/High High V High


Risk Risk Risk Risk Risk Risk Risk

Bank Pure
Bold italic product = Sharia compliant Equity
Account

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Islamic Investments

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Sharia guidelines for investment

• The Sharia is basically concerned with two major issues

Core business of the company

Finances of the company

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1. Core business of the company

• An Islamic investor may not purchase the shares of


corporations whose primary or basic business is unlawful
(haram).

• Investments in companies dealing in pork, alcohol, liquor,


gambling, etc is not permissible. As is investing in companies in
the entertainment sector such as casinos and hotels which
generate much of their revenue from gambling and alcohol

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2. Finances of the company

• Shariah scholars have set certain parameters to qualify a


company, which is involved in permissible financial
transactions, for investment by Muslims.
• Debt to Equity ratio
Refers to the debt or corporate borrowings of the company. These
borrowings are made from sources such as banks and capital
markets. The rule is that a debt to equity ratio of less than one third
is tolerable. This limit is only applicable to companies whose
primary businesses are acceptable.
• Interest earning
Islamic indexes have laid down the condition that a company’s non
operating interest income, as a percent of its revenue, must be less
than 5% for it to qualify as a permissible investment.
Investor in turn should donate this 5% interest earned by the
company towards charity.

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2. Finances of the company

• Cash & Receivables


The Islamic Shariah distinguishes between sale of real goods and
that of money and debt. In the latter such sale can only be done at
par value. Anything more (or less) may be considered usurious
from the Shariah point of view.

Many Islamic Indexes and screens lay down the rule that ,a
company’s accounts receivables ,as a percent of its total assets
,must be less than 33%.

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Part 2
Customer Profiling

Source: Euromoney Training

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Customer Profiling

• The process by which an AM understands the customer’s –


• Investment goals
• Investment constraints

• Client Profiling is closely associated with

• Client life cycle

• Attitude towards risk

• Financial circumstances : total wealth, size current


investment

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Investment Goals

• Returns

• Magnitude : how much?


• Form : current income or capital growth

• Liquidity : How much cash and when

• Tax Goals

• Others : Unique Goals / Preferences

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Types of Goals

• Near Term

• Low Priority : vacation, luxury goods


• High Priority : mortgage payments, children’s
education

• Long Term

• Low Priority : Philanthropy, Gifts to Children


• High Priority : Retirement Funding

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Investment Constraints

• Cash Flow availability for investments

• Risk Profile : aversion or tolerance

• Time Horizon : How long?

• Liquidity Needs : High or Low

• Tax situations

• Others : Unique constraints

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Types of Constraints

• Heavy Current Needs

• Short Time Horizons

• High Liquidity Needs

• Unique Constraints : moral beliefs, fear of disclosure

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Investor Lifecycle

• Accumulation Phase – young adulthood to middle age; growing


income; asset acquisition; small savings; low risk tolerance.

• Consolidation Phase – middle age to retirement; income


peaking; shift from short term to long term investing; net worth
increases; high risk tolerance.

• Spending Phase – retirement to death; declining income; asset


liquidation; regular income requirement; very low risk tolerance.

• Gifting Phase – retirement to death; providing financial


assistance to others (charities, gifts); estate planning

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Investor Attitude Towards Risk

• Changes with lifecycle

• Income phase – low to medium risk tolerance

• Growth phase – high risk tolerance

• Retirement phase – low risk tolerance

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Part 4
Investment Sales Process
And Documentation

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Investment Sales - Process

• Step I - Account Manager contacts customer. Sets up


meeting for self with/without Investment Specialist. Client is
clearly informed that the meeting is being requested for offering
Emirates Bank investment products.

• Step II - AM meets up with the client. Initially, an


attempt is made to understand the client’s investment profile.
This also involves understanding the products, markets, asset
classes, that the customer is already invested into and the time
frame of these investments.

• Step III - AM to request customer for a detailed risk


profiling (Investor Financial Assessment – IFA). AM to put
his/her comments of risk profiling and have it signed by
customer.

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Investment Sales - Process

• Step IV - Based on the results of the risk profiling, AM


to suggest products to the client.

• Step V - Client to choose whether or not to accept the


recommendations and accordingly tick on the IFA form. Client
may choose a execution only option.

• Step VI - Investor Account Agreement to be filled up


and signed by the client.

• Step VII - AM to collect other documents (signed Term


Sheet, PP copy, proof of residence) as per product
requirements.

• Step VIII - After the meeting, AM to complete his/her part


of the Investor Account Agreement / IFA Form and send the
entire set to AMU for further processing.

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Investment Sales - Documentation

Risk Assessment.pdf

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Investment Sales - Documentation

Investor Account Agreement.pdf

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Process Document

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Investment Sales Commission

• AM gets commission from the investment income generated


• Commission paid quarterly based on performance
• 3 slabs –

Investment Total Income Commission


Target Target
Slab 1 No At least 80% 10%
Slab 2 Yes At least 80% 20%
Slab 3 Yes Yes 35%

• 80% of the commission for the quarter paid at the end of the
quarter with the rest paid at the end of the year.
For full clarifications please contact BP&C

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Thank You

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