In respect of the manager, the following functions and duties are conferred explicitly or implicitly by the statutory provisions or trust deeds:
(1) Dealer in units.
One of the attractions of a unit trust is liquidity. The manager has since the early days of the unit trust been the provider of a ready market for the acquisition and disposal of units of schemes under its management. Under the Financial Services (Regulated Schemes) Regulations 1991, the manager must at all times during the dealing day be willing to issue units and be willing to redeem units. Similar provisions may also be found in trust deeds of non-authorized unit trusts. Read the rest of this entry »
(1) Statutory Allocation of Powers and Duties
Against this background, a structure of dual administration in the unit trust is a logical step in the functional specialization of the powers and responsibilities previously found in the single person of the trustee. The unit trust was in the forefront of this development. The first regulation of unit trusts in the United Kingdom in 1939 made the trustee-manager structure a model for the management of unit trusts. This model was adopted by many statutes of common law countries and was followed closely by unregulated schemes. Read the rest of this entry »
Section 84 of the Financial Services Act 1984 provides:
Any provision of the trust deed of an authorised unit trust scheme shall be void in so far as it would have the effect of exempting the manager or trustee from liability for any failure to exercise due care and diligence in the discharge of his functions in respect of the scheme.
This section only applies to authorized unit trusts. Exemption clauses in non-authorized unit trusts are not affected. Read the rest of this entry »
Earlier we provided two interpretations of a swap: (1) a package of futures/forward contracts, and (2) a package of cash market instruments. The swap spread is determined by the same factors that influence the spread over Treasuries on financial instruments (futures/forward contracts or cash) that produce a similar return or funding profile. As we explain subsequently, the key determinant of the swap spread for swaps with maturities of five years or less is the cost of hedging in the Eurodollar CD futures market. For longer maturity swaps, the key determinant of the swap spread is the credit spreads in the corporate bond market. Read the rest of this entry »
The pricing and bookkeeping agent is responsible for maintaining the fund’s accounting records, pricing the fund’s portfolio each day, calculating periodic distributions, determining the fund’s cash availability, preparing financial statements and filing the fund’s tax returns. A fund’s accounting records are very similar to those of a small corporation, consisting of revenue, expenses, assets, liabilities and shareholder’s equity. The pricing and bookkeeping agent is responsible for maintaining these records each day. The accounting records are the basis for calculating the fund’s NAV, the price at which shareholders buy into and sell out of the fund, as well as for determining the distributions the fund makes to its shareholders. Read the rest of this entry »
The HHI takes into account the relative size and distribution of the firms in a market and approaches zero when a market consists of a large number of firms of relatively equal size. The HHI increases both as the number of firms in the market decreases and as the disparity in size between those firms increases. Markets in which the HHI is between 1,000 and 1,800 points are considered to be moderately concentrated, and those in which the HHI is in excess of 1,800 points are considered to be concentrated. During the 1990s, the HHI for the U.S. Mutual fund industry saw a minor decrease from 396 to 352 based on assets under management,6 indicating that the industry was, and still is, fairly unconcentrated according to this statistical measure.
Another fairly unconcentrated financial industry—domestic commercial banks (including thrifts)—has an HHI of 338, based on deposits of $3.4 trillion as of December 31, 2000. A subset of that universe—domestic money center banks— is much more concentrated, with an HHI of 1,676, based on deposits of $1.5 trillion. In comparison, the U.S. airline carrier industry has an HHI of 1,330, based on 2000 revenues. Read the rest of this entry »
1. Asset growth In 1990, the mutual fund industry was a relatively small industry among financial intermediaries, with just over $1 trillion in assets, or 12% of the total sector (see Table 1). By contrast, depository institutions had almost five times the assets, or 56% of the sector (of which commercial banks accounted for $3.3 trillion or 38%, and assets of life insurance companies equaled $1.4 trillion or 16%).
By the end of the 1990s, the mutual fund industry had become a major player among financial intermediaries, with almost $7 trillion in assets and 39% of the overall sector. Although mutual fund assets slightly lagged those of all depository institutions taken as a whole-at $7.6 trillion, Read the rest of this entry »
Underlying the policy debate about merits of institutional activism is the empirical question: Does such activism have a significant impact on corporations that are the target of that activism? The short answer is that it’s unclear.
In an attempt to provide an intermediate-level answer, let us review a few points that emerge from this debate on the impact of institutional activism. To begin, the studies do not usually include proxy fights or takeover bids since these are rare events for institutional investors. In addition, these studies are all premised on the efficient markets theory, so they assume that the impact from shareholder activism can be measured by looking at a change in stock price after a specific event, such as a pension fund’s submission of a stockholder proposal.
These economic studies tend to show no or little positive price effects from proposals to change general governance procedures, such as the introduction of confidential voting or the appointment of an external board chairman (separate from the CEO). Read the rest of this entry »
As mentioned above, one group of activists has social rather than primarily financial agendas for U.S. companies. In the view of these activists, U.S. companies should help achieve social goals such as saving animals, protecting wilderness or alleviating poverty. Let’s consider whether these social goals are appropriate for most mutual funds and then for the subset of funds specifically geared to socially responsible investing.
Social activists who attempt to change corporate policies or challenge corporate practices take many different tacks in pursuit of their goals, but all are motivated by one fundamental principle: corporations shouldn’t be solely profit-maximizing entities; rather, they have an obligation to take into account their impact on social issues. Activists seek to influence companies through a variety of means—including litigation, picketing and public relations offensives—in an effort to encourage a company to alter its social policies in some fashion. Read the rest of this entry »
As you’re reading this, you may think to yourself, “I’m never going to commit this sin.” Everyone thinks this thought. When you’re reading about other people, their lustful investing behavior seems completely irrational. In the heat of investment decision-making, however, lust can hit you when you least expect it. Certain situations present themselves and rational thought takes a back seat to the moment’s infatuation. It pays, therefore, to be alert for the following situations where you’re most vulnerable to lustful investing:
There are all sorts of direct and indirect messages that make you feel your company stock is going to perform better than any other stock. You observe that your organization is extremely well-managed, that the company has great products and services and that its leaders are inspirational and honest. As our WorldCom example illustrated, it is not unusual for people to invest their entire retirement funds in their own company stock. You may receive stock options and other incentives to buy the company stock, and your boss or some other executive may assure you that it’s the best investment you could possibly make. In some cases, management may apply pressure for you to invest in the company and they may monitor your equity holdings. For some people, it feels disloyal to invest in any other company’s stock.
If this describes your investing, I don’t want to suggest that you’ve been brainwashed, but you certainly have been smitten. Why else would you entrust your livelihood and your life savings to one company? As great as your company’s management may be, people change companies. As wonderful as your company’s products are, new products with new technologies render established products obsolete. Read the rest of this entry »
BACKGROUND AND PURPOSE
The primary purpose of regulations is to protect investors, and the roots of governmental regulation of mutual funds in the longer-established markets are often associated with major scandals and market crashes.
In the USA, the stock market crash of 1929 prompted an extensive investigation by Congress into the securities industry. It revealed that overselling, or ‘ramming’ of shares, particularly radio company shares, had created unrealistic expectations and false, overvalued markets. The investigation resulted finally in the Investment Company Act 1940, which established the Securities and Exchange Commission (SEC) - this Act remains the cornerstone of US mutual fund regulation - and the Investment Advisers Act 1940. Along with two Acts passed into Federal law in the 1930s - the Securities Act 1933 and the Securities Exchange Act 2934 - these four Acts provide the bulk of federal powers over the activities of US investment companies. In fact, the only addition to US legislation affecting all companies since 1940 is the Sarbanes-Oxley Act of 2002 and that has only an indirect bearing on mutual funds themselves, being more concerned with accounting, auditing and disclosure practices of trading companies, following the Enron and Worldcom scandals. Read the rest of this entry »
Ireland - development of a mutual fund industry dates effectively from the establishment of the IFSC - the International Financial Services Centre -under legislation passed in the late 1980s as one of a number of measures to stimulate growth and employment in an otherwise poorly performing economy and capitalising on the EU’s UCITS Directive. The significant majority of funds established in Ireland are open-ended investment companies, usually listed on the Dublin Stock Exchange, designed for marketing throughout Europe. Under the Irish UCITS Regulations 1989, the Central Bank of Ireland was made responsible for authorising and supervising investment and insurance intermediaries but the Central Bank and Financial Services Authority of Ireland Act 2003 established on 1 May 2003 a single regulatory framework for the financial services industry and created the Irish Financial Services Regulatory Authority (IFSRA), with its own board and chief executive reporting directly to the Minister for Finance. Other relevant legislation includes the Unit Trust Act 1990, the Companies Acts 1963 to 1999, the Investment Limited Partnership Act 1994 and the Investment Intermediaries Act 1995.
Japan - funds analogous to investment trusts existed in Japan in 1937 in the form of investors’ associations, which, like the UK’s Foreign & Colonial Company’s original investment trust, faced challenges of legality and were dissolved in 1940, to be replaced in 1941 by undertakings that, modelled on the UK’s unit trust, found legal support. Post-war confusion led to these funds becoming closed to new investment in August 1945 and final dissolution in February 1950. Read the rest of this entry »
Korea- like Japan, Korea in the late 1960s needed to mobilise domestic capital to facilitate long-term, stable financing of large-scale industrial and infrastructure projects. The securities investment industry naturally attracted special attention and the Securities Investment Trust Business Act (SITBA) was passed in 1969, to allow the setting up of contractual-type investment trusts, and the first of these, Korea Investment Corporation, was launched that year. Under SITBA, which was implemented by related Presidential Decrees and Enforcement Ordinances, the Ministry of Finance and Economy had, by 1989, authorised three investment trust companies to undertake operations nationwide and five in provincial areas to distribute investment trusts in Seoul and in their respective specified regional areas. Read the rest of this entry »
South Africa - the Collective Investment Schemes Control Act, which updated and replaced previously existing unit trust legislation, 
was enacted in 2002 and in place at the start of 2003. This Act moved legislation more in line with international best practice and was the subject of negotiation between the trade association and regulatory authorities for some years. The Financial Advisory and Intermediary Services Act (FATS), which became law towards the end of 2002, had as its purpose the regulation of financial planners and advisers, as well as product suppliers, in the giving of advice and the conduct of their business in all areas where other industry legislation did not make specific provision. During its passage as a Bill, it had an impact in terms of how and what advisers were selling, in anticipation of the law. The Financial Intelligence Centre Act, aimed at combating rnoney-laundering activities, brought South Africa into line with international best practice and the subordinate legislation enabling effective practical implementation was in place by year-end 2002. In spite of its name, the Securities Services Act 2004 does not apply to collective investment schemes, nor to activities regulated under FATS, and the Financial Markets Advisory Board, established by the Financial Markets Control Act 1989, continues.
Australia - the first unit trust to be offered in Australia was named just that - Hugh Dalton’s Australian Fixed Trusts offering units in the First Australian Unit Trust in late 1936, when the funds industry was largely unregulated. The Australian retail funds market is now fully regulated under the provisions of the Managed Investments Act (MIA) and, more recently, the Financial Services Reform Act of 2001, which changed the licens ing and disclosure requirements. The MIA requires managers to take on the duties and obligations of the single responsible entity, whereby they are obligated under statute law to uphold unitholder rights. Under this arrangement, trustee duties have been fused with manager duties, but whilst external custody is not mandatory, the majority of managers use independent custodian services. Superannuation funds also gain the regulatory protection of the MIA, as approximately 90% of these savings are invested in wholesale and retail MIA vehicles. Read the rest of this entry »
Shares in mutual funds can be sold directly by the fund or by its management company to investors, or through agents employed by the fund or management company as sales agents or representatives in a sales force. Managers may also sell funds through independent intermediaries acting either as agents for their clients or simply as selling agents who employ consultants to provide advice and support but selling directly to the public.
In the US, mutual funds typically sell their shares through a separate organisation known as a principal underwriter or distributor, and only in a few instances will the fund sell its own shares. The independent intermediaries are usually firms set up as broker-dealers. Read the rest of this entry »
