By: 1. Kenneth A. Kim John R. Nofsinger And 2. A. C. Fernando

Lesson 13

 Last Lecture Review ◦ What is Investment Bank? ◦ Examples of Investment banks ◦ What does Investment Bank actually do? ◦ What is “Security”? ◦ Who are analysts in Investment Banks? ◦ Duties and responsibilities of “Analysts”. ◦ Methods of issuing stocks and bonds  Underwriting method  Best effort method ◦ What is “IPO”?

◦ Criticisms of Investment Banks  IPO Problems  Structured Deals ◦ Two categories of securities analysts  Buy-side Analysts (Institutional Investors)  Sell-side Analysts (Investment Bank) ◦ What is “Institutional Investors” ◦ Our focus is toward the sell-side analysts. ◦ Functions of sell-side analysts

 Quality of Analysts Recommendations ◦ Conservative predictions ◦ Under promise and over delivery is the name of this game  Potential conflicts of interests ◦ Analysts and the firm they analyse ◦ Analysts dual responsibility toward its employer (i.e. Investment Bank), the firm and the investors. The End

 Lecture Outlines ◦ Shareholders are innocent and helpless victims when scandals occur. ◦ Two categories of investors  Individual investors  Institutional investors ◦ Two questions ◦ Institutional investors are more effective and influential than the individual investors

 Benefits of Mutual Funds ◦ The advantage of professional investment management. ◦ Funds managers have real access and information about the market. ◦ Diversification in the investment. ◦ Low cost and high quality investing. ◦ Convenience and flexible.

◦ Mutual investment funds are liquid and easy to withdraw.  Costs of Mutual Funds  Hidden fee charges

 During scandals, share holders are considered as helpless and innocent victims.  Investors are divided into two categories ◦ Individuals investors ( such as you, Bill Gates) ◦ Institutional Investors ( pension funds, insurance companies, and mutual funds)

 Institutional investors invest on behalf of many small investors.  Shareholders (both individual and institutions) lose money when corporate scandals occur.  So they are more concern about their firms for more protection.

 Two Qs ◦ Why cannot shareholders also take care of themselves? ◦ Why they don’t take more responsibilities for the stocks that they own?

 Home owners take safety precautions to protect their home and rely on the local police.  Similarly, investors rely on SEC to protect their investments.  Police can’t guarantee to protect all homes. Similarly, this is just true with shareholders’ stock.

 Why individuals don’t pay attention ◦ Because most individuals don’t own enough stock to be able influence its management. ◦ Most of the shareholders consider it worthless and time wasting.  But they have to bear the cost individually, when loses occur

 Institutional investors are more effective than individual investors to influence the company’s management.

 Survey of Consumer Finances ◦ More trend of individuals are toward to own stocks through a fund rather than own stocks directly. ◦ In 2001, 69.9% of US households invested through mutual funds compared to 21.3% that owned stocks directly

Benefits of Mutual Funds  1. The advantage of professional investment management ◦ Mutual funds provide full-time, high quality professional management services by pooling the resources of many hundreds of investors. ◦ The fund manager’s goals and interests are tied to your success because their pay check is based on how well the fund performs rather than on sales commissions.

 The fund manager has instant access to real market information and is able to make trades on very large and therefore cost effective securities packages.  2. Diversification. ◦ A major advantage of mutual funds is that they invest in a wide range of options from stocks to bonds to money market securities.

 3. Low Cost, High Quality Investing ◦ An average investor could not create a well balanced portfolio holding a meagre 50 stocks. It would be too expensive. ◦ A mutual fund lets you buy into a diversified portfolio for as little as $50. in some circumstances. ◦ Typically you can get started in a well managed fund for under $1000.

 4. Convenience and Flexibility. ◦ Mutual Fund managers study the market, analyze the securities, make all the decisions on what to buy and sell, clip the coupons, collect all the interest payments and make sure dividends on the fund's securities are received, recorded and disbursed. ◦ They protect the interest of the shareholder (you)

 5. Mutual Fund Investments are Liquid and Easy to Withdraw ◦ Mutual Funds can be traded in (redeemed) at anytime so cash is available in an emergency. ◦ The money will be in your hand in about three business days.

Costs of Mutual Funds  Some critics of the industry say that mutual fund companies get away with the fees they charge only because the average investor does not understand what he/she is paying for.

 Fees can be broken down into two categories ◦ 1. Ongoing yearly fees to keep you invested in the fund. 2. Transaction fees paid when you buy or sell shares in a fund.

 summary ◦ Shareholders are innocent and helpless victims when scandals occur. ◦ Two categories of investors  Individual investors  Institutional investors ◦ Two questions ◦ Institutional investors are more effective and influential than the individual investors

 Benefits of Mutual Funds ◦ The advantage of professional investment management. ◦ Funds managers have real access and information about the market. ◦ Diversification in the investment. ◦ Low cost and high quality investing. ◦ Convenience and flexible.

◦ Mutual investment funds are liquid and easy to withdraw.  Costs of Mutual Funds  Hidden fee charges The End