Chapter 4 Asset Managers: Pension and Mutual Funds

1
Chapter 4 Asset Managers Pension and Mutual
Funds

• Business 4039

2
Question 4 - 1

• Contrast the balance sheet of trusteed pension
  funds with that of life insurance companies
• Trusteed pension plans and life insurance
  companies both have substantial investments in
  bonds, but while life insurance companies invest
  about 21 in mortgage loans, pension plans have
  less than 2 in mortgages.
• Pension plans invest over 40 in stocks,
  reflecting their very long term investment
  horizon and higher risk tolerance, while life
  insurance companies only invest about 5.
• The liabilities of the trusteed pension plans are
  the pension claims of their members, while the
  liabilities of life insurance companies are
  actuarial liabilities, debt and equity.

3
Question 4 - 2

• What are the regulations that restrict the
  investments a pension fund manager can make?
• OSFI oversees pension plans organized and
  administered for the benefits of persons working
  in businesses that are federal in scope.
• Most trusteed pension plans in Canada, however
  are under provincial jurisdiction.
• Pension fund managers are typically restricted by
  the prudent person standard and maximum
  concentration limits.

4
Question 4 - 3

• How does a sponsoring FI profit from a mutual
  fund?
• The FI obtains annual fees from managing the
  fund.
• If the fund is loaded the FI would also obtain
  fees from the sale and/or redemption of the fund.
• And if the funds trades are booked through the
  FI, it can also gain fees from its
  trading/brokering function these
  trading/brokering fees must be on an arms length
  basis.
• ...

5
Question 4 - 5

• Why would an investor prefer to buy a mutual fund
  rather than investing in the underlying
  securities (bonds, stock, and money market
  instruments?)
• A small investor purchasing bonds and stocks
  finds that the purchase and sales commissions are
  a substantial (and sometimes prohibitive) expense
  relative to the return available if the investor
  is seeking a well diversified portfolio.
• Money market instruments are available only in
  wholesale amounts (e.g., 100,000 for Bas)
• Mutual funds provide access to those markets for
  small retail investors.
• Mutual funds can provide the small investor with
  expert investment management.

6
Question 4 - 5

• How would you suggest that soft dollar
  transactions be prevented?
• It should be noted that commitment to maintain
  reputation of the Financial Advisor, the FI,
  the SRO and the industry is probably the
  strongest and most effective method of policing.