1. © 2012 Cengage Learning. All Rights Reserved. May not scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Chapter 24: Professional Money Management Alternative Assets, and Industry Ethics

2. The Asset Management Industry: Structure and Evolution Two Organization Forms –Contract directly with a management and advisory firm –Combining investment capital of several clients in an investment company Differences between These Two Forms –Private management and advisory firms develop a personal relationship with clients –A Investment company offers a general solution See Exhibit 24.1 24-2 © 2012 Cengage Learning. All Rights Reserved. May not scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

3. Exhibit 24.1 © 2012 Cengage Learning. All Rights Reserved. May not scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 24-3

4. The Asset Management Industry: Structure and Evolution Contract directly with a management and advisory firm –Relationship with client –Separate accounts –Customized Combining investment capital of several clients in an investment company –Invest a pool of funds belonging to many individuals in a single portfolio of securities –Issue new shares representing the proportional ownership of the fund. 24-4 © 2012 Cengage Learning. All Rights Reserved. May not scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

5. Private Management and Advisory Firms The majority of private management and advisory firms are still much smaller More narrowly focused on a particular niche of the market Investment Strategy –Each client’s assets are held in a separate account –The security portfolio are likely to be guided by the firm’s overall investment philosophy –While the specific stock allocations might vary, the same fundamental orientation toward stock selection will be applied to all accounts 24-5 © 2012 Cengage Learning. All Rights Reserved. May not scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

6. Organization and Management of Investment Companies Investment Companies –They are the financial intermediaries that pool the assets of individual investors and invest the fund in securities or other assets –Major Duties  Investment research  Management of the portfolio  Administrative duties –The management fee is generally stated as a percentage of the total value of the fund –Family of funds helps achieve economies of scale 24-6 © 2012 Cengage Learning. All Rights Reserved. May not scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

7. Organization and Management of Investment Companies Fund Management Fees –Charge annual management fees to compensate professional managers of the fund –The fee typically is a percentage of the average net assets of the fund varying from about 0.25 to 1.00 percent –Management fees are a major factor driving the creation of new funds –Mutual fund fees decline with the size of the fund –More assets under management generate more fees 24-7 © 2012 Cengage Learning. All Rights Reserved. May not scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

8. Organization and Management of Investment Companies The nature of assets held in a mutual fund define its Investment objectives –Equity funds: They invest almost exclusively in common stocks –Bond funds: These funds concentrate on various types of bonds to generate high current income with minimal risk –Balanced funds: They diversify outside a single market by combining common stock with fixed income securities –Money market funds: They invest in diversified portfolios of short-term securities 24-8 © 2012 Cengage Learning. All Rights Reserved. May not scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

9. Organization and Management of Investment Companies Global Investment Companies –Funds that invest in non-Saudi securities are generally called either international funds or global funds –International funds often hold only non-Saudi stocks from other countries, such as Asia and Europe. For example, “Al-ahli Europe Trading Equity Fund” –Global funds contain both Saudi and non-Saudi securities. For example, “Global Property Fund” in Riyadh Capital Company 24-9 © 2012 Cengage Learning. All Rights Reserved. May not scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

10. Ethics and Regulation in the Professional Asset Management Industry Agency Problem The Capital Market Authority (CMA) had Issued an Implementing Regulations that Manages the Asset Management Industry –Such as the Investment Funds Regulations –http://www.cma.org.sa/en/Pages/Implementing_Regu lations.aspx 24-10 © 2012 Cengage Learning. All Rights Reserved. May not scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

11. What Do You Want from a Professional Asset Manger? Help determine your investment objectives and develop a portfolio that is consistent with them Diversify your portfolio to eliminate unsystematic risk Maintain your portfolio diversification and your desired risk class while allowing flexibility so you could shift between alternative investment instruments as desired Attempt to achieve a risk-adjusted performance level that is superior to that of your relevant benchmark Administer the account, keep records of costs and transactions, provide timely information for tax purposes, and reinvest dividends if desired Maintain ethical standards of behavior at all times 24-11 © 2012 Cengage Learning. All Rights Reserved. May not scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

12. The Internet Investments Online 24-12 http://www.morningstar.com http://www.lipperweb.com http://www.brill.com http://www.mfea.com http://www.investorguide.com/funds.html http://www.ici.org http://www.hedgefundresearch.com http://www.privateequity.com © 2012 Cengage Learning. All Rights Reserved. May not scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.