ASSET MANAGEMENT
Lecture 1 – INTRODUCTION AND OVERVIEW OF THE FUND MANAGEMENT INDUSTRY
The 4 main ASSET CLASSES:
1) CASH – notes, coins, banks deposits, short-term government bonds under 1-year
because they are the most liquid)
Advantages: liquid, safe (less uncertainty)
Disadvantages: low return, may not be as safe as we think (because of the banking
crisis for e.g.)
2) EQUITY/SHARES can be classified into 3 types:
Domestic (UK) = underlying shares risk (uncertainty of return)
Developed nation (France, Germany) = underlying shares risk + exchange
rate risk
Emerging market (India, Ecuador) = underlying shares risk + exchange rate
risk + political risk
Advantages: offers higher return than bond and cash
Disadvantages: has greater risk than bond and cash
3) FIXED INCOME/BONDS/DEBT can be classified into 3 types:
Domestic (UK) = interest rate risk + credit risk + rating risk (depending
whether the bond will be hold till maturity or not)
Developed nation (France, Germany)
Emerging market (India, China)
Advantages: offers higher return than cash
Disadvantages: has greater risk than cash
4) ALTERNATIVES – derivatives, private equity, real-estate, commodities and art
Advantages: low correlation with other asset classes, well diversified,
reduced volatility of overall portfolio
Disadvantages: illiquidity (higher transaction/trading costs but with ETFs it is
less difficult to trade)
ASSET ALLOCATION – the choice of allocating money across different asset classes
SECURITY SELECTION – the choices within asset classes
SERVICES provided by INVESTMENT COMPANIES:
1. Record keeping of what is going on in terms of assets in their fund and
administration
2. Access to diversification and divisibility
3. Professional management (professional managers who know what to do with their
investors’ money)
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Lecture 1 – INTRODUCTION AND OVERVIEW OF THE FUND MANAGEMENT INDUSTRY
The 4 main ASSET CLASSES:
1) CASH – notes, coins, banks deposits, short-term government bonds under 1-year
because they are the most liquid)
Advantages: liquid, safe (less uncertainty)
Disadvantages: low return, may not be as safe as we think (because of the banking
crisis for e.g.)
2) EQUITY/SHARES can be classified into 3 types:
Domestic (UK) = underlying shares risk (uncertainty of return)
Developed nation (France, Germany) = underlying shares risk + exchange
rate risk
Emerging market (India, Ecuador) = underlying shares risk + exchange rate
risk + political risk
Advantages: offers higher return than bond and cash
Disadvantages: has greater risk than bond and cash
3) FIXED INCOME/BONDS/DEBT can be classified into 3 types:
Domestic (UK) = interest rate risk + credit risk + rating risk (depending
whether the bond will be hold till maturity or not)
Developed nation (France, Germany)
Emerging market (India, China)
Advantages: offers higher return than cash
Disadvantages: has greater risk than cash
4) ALTERNATIVES – derivatives, private equity, real-estate, commodities and art
Advantages: low correlation with other asset classes, well diversified,
reduced volatility of overall portfolio
Disadvantages: illiquidity (higher transaction/trading costs but with ETFs it is
less difficult to trade)
ASSET ALLOCATION – the choice of allocating money across different asset classes
SECURITY SELECTION – the choices within asset classes
SERVICES provided by INVESTMENT COMPANIES:
1. Record keeping of what is going on in terms of assets in their fund and
administration
2. Access to diversification and divisibility
3. Professional management (professional managers who know what to do with their
investors’ money)
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