1
Q
Who invests money?
A
- Private individuals (or a retail investor, which is an individual who purchases securities for his or her own personal account rather than for an organisation)
- Corporate investors
- Main investors are ‘financial institutions’ (i.e. banks)
- Insurance companies (life insurance / general insurance) (insurance-linked securities, or ILS, are essentially financial mechanisms which are sold to investors whose value is affected by an insured loss event. As such the term insurance-linked security encompasses catastrophe bonds and other forms of risk-linked securitization)
- Pension funds
- Investment companies
- Investment banks
- Investment trusts and unit trusts, real estate companies, charities, sovereign wealth funds.
- Society: illustrated through collections of art, museum pieces, antiques etc.
2
Q
What is the aim of investing money?
A
- Maximum return for minimum financial outlay
- Minimise risk
- Find investment that provides the ‘best value’
- Typically high risk = high return
- Investors must compromise, depending on their own investment strategies
- Diversification of the investment portfolio
- Perform within a specific time period
- Do investors want assets that behave and respond in similar ways to the market?
- Is there a need for liquidity?
3
Q
How does risk diversification work?
A
- Higher number of investments = lower risk
draw risk chart against no. of investments
4
Q
What are the types of risk?
A
- Unsystematic / Specific (to the property) / non-Market Risk:
- Risks affecting investment where investor has some control
- Examples: investment financing & gearing (higher gearing = more risk), tenant selection, property selection, property characteristics and location
- Applies to individual assets (shares/property).
- Some ability to reduce these risks through prudent asset selection & portfolio diversification. - Systematic / Non-specific / Market Risk:
- Risk related to extrinsic factors beyond the control of the investor.
- Market risk (dependent on the general economic conditions).
- Examples: economic, social, environmental, political changes, changes in interest or inflation
There is no such thing as a ‘risk free’ investment!
5
Q
What is decision making generally affected by?
A
- The investor’s available capital (Capital investment may also refer to a firm’s acquisition of capital assets or fixed assets)
- Equity (value of an asset less the amount of liabilities: assets-liabilities = equity)
- Market prices (the current price at which an asset or service can be bought or sold)
- Projected and expected future cash flows
- Availability/comparison of alternative investment cost & potential return (occ)
- Asset risk & security
- Time value of money (present value) and duration of investment
- Liquidity (Liquidity describes the degree to which an asset or security can be quickly bought or sold in the market without affecting the asset’s price. Cash is considered the most liquid asset, while real estate, fine art and collectables are all relatively illiquid.)
- Marketability & transaction costs
- Ease of management
- Investor’s investment strategy (core values)
- Transparency
- Amount of investment control
- Nature of governance
- Nature of taxation
6
Q
What are the characteristics of assets such as shares/equities and direct property?
A
Shares / Equities:
- Equities are stocks – shares in a company. If you buy stocks, you’re buying equities (they represent ownership in a firm). We can think of equity as one’s degree ownership in any asset after all debts associated with that asset are paid off. For example, a car or house with no outstanding debt is considered entirely the owner’s equity because he or she can readily sell the item for cash, and pocket the resultant sum.
- Homogeneous (a portfolio may be homogeneous if its securities are largely in the same industry or type. E.g. if portfolio is only stocks = homogeneous)
- Liquid
- Central marketplace
- Low transaction costs (transaction costs can include brokers’ commissions and spreads)
- Easily & quickly traded
- Many buyers/seller
- High turnover potential (turnover is the net sales generated by a business, while profit is the residual earnings of a business after all expenses have been charged against net sales).
- Mobile / fluid asset
- Responds quickly to market information
- Can be Short Term / MT / LT holding
Direct Property:
- Heterogeneous (results in variation from one service to another, or variation in the same service from day-to-day or from customer-to-customer. Heterogeneity makes it hard for a firm to standardize the quality of its services)
- Illiquid
- No central marketplace
- High transaction costs
- Slower to trade
- Limited buyers/sellers
- ‘Lumpy’ asset
- Immobile: location specific
- Inelastic in the short term.
- Typically a MT – LT holding.
- Imperfect knowledge base.
7
Q
What are the three asset classes?
A
- Shares
- Stocks (stock market)
- Bonds
8
Q
What is the ‘Share’ asset class?
A
- Offer wide range of investment opportunities
- Interests can be easily diversified & distributed
- Purchasing a legal right through an equity interest
- NO guaranteed return (capital or income)
- Dividends (regular payments to investors) are distributed only if the company chooses to pay out profit (retained earnings vs. dividends)
- No tangible responsibilities (i.e. management etc)
9
Q
What is the ‘Stock’ asset class?
A
- Assets can be traded on the stock market (stock market = collection of markets and exchanges where the issuing and trading of equities / stocks of publicly held companies, bonds and other sorts of securities takes place)
- Both a primary and secondary market.
- Provides a large amount of LT capital finance.
- Provides a wide range of securities to investors (securities = tradeable financial assets, such as equities or fixed income instruments, purchased to be held for investment)
- Encourages retention of earnings by firms.
- Encourages optimal allocation of capital resources.
- Provides active information to allow investment decisions and future projections to be made.
- This information can also be used for performance measurement, identifying strengths/weaknesses (e.g. FTSE 100 indices)
10
Q
What is the primary ‘Stock’ market?
A
- Brings together investors & those who need finance.
- Initial public offering (IPO): Sell privately held stakes in a company to the public, ‘going public’ or being ‘floated on the market’.
- Seasoned equity offering (SEO): Sale of additional shares by listed companies.
11
Q
What is the secondary ‘Stock’ market?
A
- The trading of existing shares.
- Most active part of the market, enables investors to liquidate assets quickly
12
Q
Who are the key investors in markets?
A
- Private investors
- Foreign investors
- Institutional investors (which now dominate)
The stock market offers more efficient management of assets, to reflect the changing demographics of the ‘global’ market
13
Q
What is the ‘Bonds’ asset class?
A
- A bond is a debt security / finance, similar to an IOU (for example Government bonds from Sustainable property).
- Issuers issue bonds to raise money from investors willing to lend them money for a certain amount of time.
- When you buy a bond, you are lending to the issuer, which may be a government, municipality, or corporation. In return, the issuer promises to pay you a specified rate of interest during the life of the bond and to repay the principal amount when it “matures,” or comes due after a set period of time.
- People who buy bonds: usually professional investors, including insurance companies, pension funds, and banks on behalf of customers or on their own account.
- Individual investors can also buy them, usually through a broker.
- Seen as the least riskiest investment (involves the government).
- Government bonds = ‘gilts’ (typically very secure).
- ST <5yrs / MT 5-15 yrs / LT 15-25 yrs / undated bonds.
- Corporate bonds (issued by companies, less secure).
- Index-linked bonds (ILG), introduced in the UK in 1981. Typically low return, purchased for face value.
- ILGs will go up (or down) in line with inflation. Differ from conventional gilts in that both the semi-annual coupon payments and the principal payment are adjusted in line with movements in the General Index of Retail Prices in the UK (also known as the RPI)
- ‘Coupon’ paid out regularly until the bond matures, paid annually or bi-annually.
- Typical return 4.5% 2014-2017 / Tr 8% 2020
- Double dated gilts – if there are two dates then the government can choose to redeem the bond at any point between these two dates.
14
Q
Which is better - shares or bonds?
A
- Shares/equities are better and typically outperforms gilts/bonds.
- If £100 was invested in 1999, in 2009, the UK real return for:
- Equities would be £22,400
- Bonds would be £450
Therefore Equities > Bonds :)
15
Q
What is the difference between REAL and NOMINAL income?
A
- Real: Real value is the money in comparison or relation to a specific base year. To get the real return, you account for / adjusted for the impact of inflation with the nominal values and bring the figures back to a comparable value to the base year.
- Nominal: Nominal is the present value, i.e. the value of the money right now, so current prices / values which are not adjusted for the impact of inflation.
- The difference is inflation. This is due to the effect of the time value of money.
- If prices go up, nominal income (dollar income) being the same, real income goes down.
- If prices go down, nominal income (dollar income) being the same, real income goes up.
- Prices being the same, if nominal income (dollar income) goes up, real income goes up.
- Prices being the same, if nominal income (dollar income) goes down, real income goes down.
16
Q
What are the key influences before deciding to invest in physical property?
A
- Where is the market currently at?
- What capital value is needed and what debt will I have?
- Security of income and capital
- The lease
- Direct or indirect property
- Rent / income
- Physical aspects (building style / quality / age)
- Stamp duty
17
Q
What are the characteristics of leases in the UK?
A
- Lease structures have changed in recent years
- Used to be 25 year terms, which have continuously decreased in length.
- Typically include a rent free period as an incentive (better to have the building occupied than empty)
- Tenant typically pays business rates = positive for the landlord, one less expenditure for them
- Leases in the UK are NOT linked to inflation (unlike other European countries where index linked rents are common).
- Terms are generally subject to negotiations.
18
Q
How is debt / leverage / gearing considered in investments?
A
- How much are you going to have to borrow as an investor in order to make this investment?
- Highly geared investments are generally more risky – you are accruing more debt
- Debt is likely to be repayable at a higher interest rate.
19
Q
What is indirect property investment?
A
- Indirect real estate investing typically involves buying shares in a fund or a publicly or privately held company (i.e. NOT directly in physical property)
- For example, to buy shares of non-traded or publicly-traded real estate investment trust (REIT) stocks.
20
Q
What is a close-ended fund?
A
- Organised as a publicly traded investment company by the Securities and Exchange Commission (SEC).
- A closed-end fund is a pooled investment fund with a manager overseeing the portfolio; it raises a fixed amount of capital through an initial public offering (IPO - first time a company comes on the stock exchange).
- The fund is then structured, listed and traded like a stock on a stock exchange.
- Listed stocks and funds usually quote their share/unit prices with income accrued between distribution dates.
- Once the distribution (dividends) are paid out, the price therefore falls (‘Ex-dividend’).
21
Q
What is an open-ended fund?
A
- An open-ended fund could be visualised as a big pool of money. The money belongs to thousands of small investors.
- The fund, or pool is divided into units. Investors can buy or sell units at any time. As people buy units, the pool gets bigger; as they sell them, it gets smaller (this is what is meant by the term ‘open-ended’).
- The unit price is calculated daily by working out the value of all holdings in the fund – cash, shares, bonds or whatever – and dividing it by the number of units.
- A fund manager makes decisions about what to invest the money in, within the scope of the agreed investment mandate.
- The objective is to provide returns to the fund’s investors, either in the form of capital growth (an increase in the price per unit) or income (dividends paid to the unit holders in proportion to the number of units they hold).
- Usually quote their share/unit prices with income accrued between distribution dates.
- Once the distribution (dividends) are paid out, the price therefore falls (‘Ex-dividend’).
22
Q
What is an investment fund?
A
- An investment fund is a supply of capital belonging to numerous investors used to collectively purchase securities, while each investor retains ownership and control of his own shares.
- An investment fund provides a broader selection of investment opportunities, greater management expertise and lower investment fees than investors might be able to obtain on their own.
- Individual investors do not make decisions about how a fund’s assets should be invested. They simply choose a fund based on its goals, risk, fees and other factors.
- A fund manager oversees the fund and decides which securities it should hold, in what quantities and when the securities should be bought and sold
23
Q
What is the difference been open-ended and close-ended funds?
A
- Both are professionally managed funds and achieve diversification by investing in a collection of stocks or other investment assets rather than in a single stock.
- Both pool the resources of many investors to be able to invest on a larger and wider scale.
BUT THEY ARE DIFFERENT BECAUSE: - Open-end funds are offered through a fund company that sells shares directly to investors. The number of shares is NOT FIXED and is theoretically unlimited. The fund sells as many shares as investors wish to buy.
- In contrast, a closed-end fund has a FIXED number of shares offered by an investment company through an initial public offering. Thereafter, closed-end fund shares are traded on an exchange, just like an individual stock. Investors acquire fund shares by purchasing them on the exchange through a brokerage account.
- Open-end fund prices are FIXED once a day at their net-asset value. That NAV settlement price is the only price at which fund shares can be purchased that day.
- In contrast, closed-end funds trade throughout the day like individual stocks and can be bought or sold at ANY price the fund trades at during the day. Since market demand determines the price level for closed-end funds, fund shares typically sell at either a premium or a discount to net asset value.
24
Q
What are some investment methods which enable diversification?
A
- REITs (Real Estate Investment Trusts - closed ended funds: only a limited number of shares available – listed on the LSE)
- Unlisted property vehicles (Investors buy ‘units’ in a trust holding investment property or properties, which are managed by a professional investment manager like Trilogy Funds.)
- PAIFs (Property Authorised Investment Fund) - (property authorised investment fund – open ended – unlisted)
- PUTs (Property Unit Trusts) - (buy and sell units of the trust, which is likely to have a substantial (but not all of its) investment in property)
- RE derivatives (the value of the investment is derived from the underlying assets, ‘derived’ from it – options and futures)
25
What are the functions of a stock market?
- Both primary markets (this is where companies sell shares to investors and then use the proceeds in their businesses) & secondary market (where shares are traded between investors)
- Large long-term capital finance
- Wide range of securities (tradeable financial assets) to investors
- Encourages retention of earnings by firms
- Provides active information to allow investment decisions and future projections to be made.
- This information can also be used for performance measurement, identifying strengths/weaknesses (also via indices)
26
What are the characteristics of the stock market?
- Many buyers & sellers.
- No barriers to entry/exit.
- Information available at little or no cost.
- Low transaction costs.
- High turnover potential.
- Liquid.
- Regulated by government.
- Responds to new information quickly and efficiently.
Main international stock markets = London, New York and Tokyo
27
How do you become listed on the LSE?
- Companies have to sign a listing agreement that commits directors to certain standards of behaviour & levels of reporting to shareholders.
- The United Kingdom Listing Authority (UKLA) part of the FSA, rigorously enforces a set of demanding legal rules.
- To join the LSE’s main market the shares have to be admitted to the Official List by the UKLA and be admitted by the LSE for trading.
- The status & visibility of a company can be enhanced by being included on the prestigious official list.
- The company directors must prepare a prospectus.
- Proceed with Initial Public Offerings (IPOs)
28
Why invest in shares / equities?
- When you buy a share you a buying a set of legal rights, but NOT guaranteed of any return on the money that you hand over to buy an ordinary share.
- The company has no obligation to give you a dividend (pay-out of profit) or give your capital back.
- Shareholders own all the value that is created by a business after lenders and others have received the amounts they are owed.
- Wide range of investment opportunities.
- Interest can be diversified & distributed between a multitude of different investments.
- No tangible responsibilities: unlike property.
29
What is the size of the UK property market?
- IPF, 2017:
- UK property market is estimated to be worth circa £6,800bn.
- Commercial property represents around 13% (£883bn), with around £486bn (55%) of this being ‘investable’.
- The residential market accounts for some £5,915bn of the total, 63% of which is owner-occupied.
- The UK property investment market has been dominated traditionally by three main sectors: Office (currently £208bn); Retail (£171bn); and Industrial/distribution (£60bn).
30
What are the pros and cons of direct property investment?
```
- IPF, 2017:
Pros:
- Physical asset
- Some inflation protection
- Capital growth potential
- Stable income return
Cons:
- Illiquid
- Heterogeneous asset
- High transaction and management costs
- No guarantee that valuation and sale price will be the same
```
31
What are the pros and cons of INDIRECT over direct investment?
- IPF, 2017:
Pros:
- Can invest smaller amounts
- Benefits of diversification
- Liquidity
- Low transaction and management costs (no management responsibilities)
- Opportunity to specialise by sector / location
- Governance oversight
Cons:
- Lack of control over investment decisions
- Possible increased volatility in returns from gearing
- Returns may not mirror those of direct property
