THOUGHT FOR THE SESSION The wise listen and add to learning, - - PDF document

1 CIS & Market applications

Wealth Management Skills Program

THE ACADEMY OF FINANCIAL MARKETS WELCOME TO THE SESSION!

THOUGHT FOR THE SESSION

The wise listen and add to learning, because understanding guards them.

Module 12: Market Knowledge application and CIS

Application of market knowledge is

always done through the financial planning process.

Six step financial planning process

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Module 12: Market Knowledge application and CIS

Funding and investment needs:

Establish client’s needs:

Corporate Individual

Tools:

Credit ratings (Corporates) Credit checklist Risk profile questionnaire

Module 12: Market Knowledge application and CIS

Source of funding and investment

instruments: The Financial Markets

Money Market (Cash type) Bonds Equity Property

Module12: Market Knowledge application and CIS

Finding solutions for customers needs:

Funding solution for individuals:

Overdrafts Personal loans Home loans Asset finance Credit cards Consolidated loans

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Module12: Market Knowledge application and CIS

Investment solution for individuals:

Level 4 funds Part of financial planning Four important steps Active vs. passive investment (See interesting

information)

Active investment – According to economic cycles

Module12: Market Knowledge application and CIS

Investment solution for individuals:

Passive strategy guidelines

Static portfolio Age rule portfolio Time horizon portfolio Risk profiled portfolio Example 2 & 3

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Module12: Market Knowledge application and CIS

Ex 2:

Static: Cash 10, Bonds 35, Equities 55 Age: Equities 60 Horizon: Cash 0, Bonds 5, Equities 95 Risk profile: Cash 10, Bonds 5, Equities 85

Ex 3:

Salary: R20 000 x 3 = R 60 000 Risk profile 10% x 500 000 = R 50 000

Module 12: Market Knowledge application and CIS

Finding solutions for customers needs:

Investment solution for individuals – supervising the portfolio:

Re-balancing – Example 4

Module 12: Market Knowledge application and CIS

Finding solutions for customers needs:

Investment solution for individuals – supervising the portfolio:

Risks (Behavioral finance):

Overconfidence Mental accounting Loss aversion - Example 5 Framing Gamblers fallacy Regret aversion Examples 6, 7, 8, 9

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Module 12: Market Knowledge application and CIS

Finding solutions for customers needs:

Funding solution for corporates:

Corporate have wider choices, such as local or

foreign funding, equity vs. debt

Money and capital market options with fixed or

floating rates

Company looks at capital structure and use

(project projections) of money borrowed.

Credit ratings play a role Structured finance is often used (Combination

• f products, liquidity and cash-flow)

Module 12: Market Knowledge application and CIS

Finding solutions for customers needs:

Investment solution for corporates:

Often project investment rather than other

equities or instruments

IRR is important Can buy back own shares

Example 10, 11

Module 12: Market Knowledge application and CIS

Measuring the solution:

Benchmarking

Choice and usefulness of benchmark Example 12

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Module 12: Market Knowledge application and CIS

CIS: Collective investments

Definition Industry overview Role-players Classification of unit trusts Pricing of unit trusts (see textbook) TER Other CIS

Module 12: Market Knowledge application and CIS

CIS: Collective investments

The ACF Unit trust has 60m units in issue and the NAV per unit is 95c. The initial fee is 2% excl. VAT. The total expense of the fund is R2,5m. You are required to indicate:

The effective purchase price By how much must the investment increase for

you to break even?

The TER? How many units will you get for an investment

• f R 10 000?

Module 12: Market Knowledge application and CIS

CIS: Collective investments

Initial fee incl. = 2% + (14%) = 2.28% Effective price = 95/(100-2.28%) = 97.22c (97.22-95)/95 = 2.34% 2.5m / (60m x 95c) = 4.39% R 10 000 / 97.22c = 10 285.95 units