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Non-Banking Financial Institutions.

Autor:   •  March 16, 2019  •  Course Note  •  1,645 Words (7 Pages)  •  126 Views

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Non-Banking Financial Institutions

Investment banks

  1. Limited short-term loans; tends to sell off these loans into the secondary market.
  2. Limited assets.
  3. Focus on advisory services, mainly OBS, e.g.:
  1. Act as foreign exchange dealer.
  2. Advise on raising funds.
  3. Act as underwriter.
  4. Placement of new issues to institutional investors (corporate client list).
  5. Advice on balance sheet restructuring (how to fund assets).
  6. Project financing / high-risk lending.
  7. Risk management strategies.
  8. Venture capital.
  9. Mergers and acquisitions.
  1. Types of M&A: horizontal (same), vertical (related), conglomerate (unrelated).
  2. Spin-offs.
  3. Synergy benefits from M&A:
  1. Economies of scale.
  2. Financial advantages (greater access to debt funding owing to enhanced reputation).
  3. Growth opportunities (inorganic growth).
  4. Business diversification (reducing of risk from concentration in single industry / sector).

Managed funds


  1. What is it? Pooled savings of many individuals invested under the control of professional fund managers.
  2. Dual protective structure (separate fund manager and custodian of cash/securities).

Responsible entity = trustee + appointed fund managers.

  1. In Australia, more common is trust fund.
  2. Trust deed lists out sources, uses, and distribution of funds.
  3. Popularity increased? Because of:
  1. Deregulation.
  2. Population: ageing (more retirement funds), highly-educated, affluent.
  1. Common funds:
  1. Operated by trustee companies.
  2. Differs from unit trusts – they do not issue units to investors.
  1. Friendly societies:
  1. Provides investments & employment benefits.
  1. Direct access.

Pooled money 🡪 Contractual arrangement (periodic payments e.g. superannuation OR lump sum e.g. insurance policy) 🡪 Several appointed fund managers 🡪 Trustee 🡪 Investors

  1. Professional fund managers
  1. Funds allocated to a few.
  2. Risk and performance management.
  3. Typical things they do: Authorised investment, diversified investment, reinvestment, asset portfolio restricting (due to market changes), advice, report.
  1. Superannuation funds are the most popular as of late.

Capital guaranteed fund:

  1. Provides potential positive returns while guaranteeing investors’ capital.
  2. Guarantee of initial capital invested – however this is not always the case. Has been subject to review by ASIC.

The guarantee or protection on your capital is achieved by structuring investments in a variety of ways:

  • Some investments provide a guarantee by investing through a life insurance company.
  • Others use a portion of the money you invest to buy a bond to provide capital protection and then invest the remainder of the money in options and other derivatives.
  • Other ways of delivering a guarantee include combining a guarantee from a bank with hedge fund or derivative investments.

Capital stable fund:

  1. Aims to secure investors’ capital but does not provide explicit guarantee.

A fund that invests across a range of asset classes but with a significant portion in defensive assets such as fixed interest instruments and cash and a small portion in growth assets such as shares and property. This type of fund aims to provide a moderate level of income with some capital growth.

Balanced growth fund:

  1. It is a managed fund that provides for longer-term income streams with some / limited capital growth.
  2. More risky and aggressive than capital stable fund.
  3. Longer income stream and some capital appreciation.
  4. Suitable for: long-term investment horizon and people willing to accept higher risk.

Managed / capital growth fund:

  1. Investors obtain greater future return from capital growth, but lower income streams.
  2. Suitable for: long-term investment horizon and people willing to accept very high risk.
  3. Invests in greater range of risk securities.

Note: the name of the fund is not always indicative of the nature of the risk of the fund.

Managed fund type 1:

Cash management trusts

  1. Managed by financial intermediary under terms of trust deed.
  2. Trustee supervises; manager handles day-to-day.
  3. Source of funds: usually accumulated savings.
  4. Uses of funds: invest in wholesale money-market (short-term) securities, e.g.:
  1. Bills of exchange.
  2. CDs.
  3. Promissory notes.
  1. Highly liquid – normally withdrawn on 24 hours; notice.
  2. Popular in stockbroking industry – CMT used as settlement fund.

Managed fund type 2:

Public unit trusts

  1. Where investors purchase units 🡪 Funds pooled 🡪 Invested in specified assets in trust deed.

Types of public unit trusts:

  1. Property trusts: industrial, commercial, retail, residential property.
  2. Equity trusts: depending on whether they are income OR growth equity trusts, type of investing differs.
  1. Income: invest in shares with high dividends.
  2. Growth: invests to seek greater capital gains.
  1. Mortgage trusts: invests in ‘first mortgages’.
  2. Fixed-interest trusts: bonds by government or debentures by corporations.

Listed vs. unlisted trusts (property or equity)

  • Listed: traded on stock exchange. (liquid)
  • Unlisted: unit holder must sell back to trustee after notice.

Note: most property trusts are listed, most equity trusts are not because the underlying shares are highly liquid and the trusts themselves need not be listed.

Managed fund type 3:

Superannuation funds

  1. Types of superannuation funds
  1. Corporate: for employees in a specific corporation.
  2. Industry: for employees in a specific industry.
  3. Public sector: for government employees.
  4. Retail: ‘for profit’, unlike the above funds; run by financial institutions; fees charged in the form of a % of investment earnings.
  5. Self-managed:

  • Regulated by the ATO.
  • Up to 4 members; do-it-yourself super funds.
  • Highly protective of invested capital, but overly conservative – largely invested in shares and cash (e.g. term deposits).
  • Though seen as uncontroversial, SMSFs may expose themselves to concentration risks / company specific-risks for lack of diversification.
  1. Roll over: Allows investors with pre-existing superannuation funds to have their funds held. Those who choose to withdraw from a fund to make a new one can roll over their existing superannuation as an eligible termination payment.
  1. A superannuation fund may be contributory (employer and employee) OR non-contributory (only employer).
  2. Compulsory superannuation scheme: In AU, it is called the superannuation guarantee charge (SGC).

Defined benefit fund:

Amount of superannuation paid based on defined formula. Employer to make shortfall if amount in the end does not meet predetermined amount.

  • Investment risk lies with employer.

Accumulation fund:

Amount of superannuation paid = Contributions + earnings from investment – expenses – taxes.

  • Investment risk lies with employee.

  1. Regulation
  1. APRA supervises superannuation funds; ASIC supervises superannuation products.
  2. Sole purpose test: to invest in assets to achieve members’ preferences.
  3. 15% concessional tax rate on superannuation contributions + earnings.
  4. Withdrawals after 60 are tax free.

Managed fund type 4:

Statutory funds of life offices

  1. Life insurance offices = contractual savings institution.
  2. Accumulates and invests savings of superannuation – therefore regulated by APRA.
  1. Subject to same capital adequacy + liquidity management requirements.
  1. Statutory fund: funds separate from other assets of the life insurance office, held only for paying life insurance benefits.


  1. Pays the sum insured + bonuses from investment of premiums on death of policyholder.
  2. Surrender value paid upon cancellation of policy.


  1. Pays specified benefit on death of insured – should death occur during the term.
  2. Premiums can increase over time to reflect increasing risk of death.
  3. Disclosure of pre-existing health conditions required.


  1. Total and permanent disablement.
  2. Trauma.
  3. Income protection (offset by other workers’ compensation payments).
  4. Business overheads.

Managed fund type 5:

Hedge funds

  1. Funds that invest in exotic, high-risk financial products for high net worth individuals, institutional investors, and also retail.
  2. Single-manager vs funds of funds.
  3. May be listed on a stock exchange.
  4. Sometimes borrows large amounts of debt.

General insurance offices

  1. C.f. life insurance office: claims from policyholders are less predictable.
  2. Invest in: short-term, money market securities, e.g.:
  1. Bills of exchange.
  2. CDs.
  3. Commercial papers.

House and contents insurance

  1. Insure loss / damage to residential property.
  2. Includes public liability insurance: covers injury / death of visitor due to negligence.
  3. Co-insurance clause: in the event of under-insurance, the policy will only cover the proportional value insured. E.g. house insured for $400k, but should actually be insured for $500k, if there is $100k damage to house, insurance will not cover full $100k but only $80k.

Motor vehicle insurance

Comprehensive insurance > Third-party, fire, and theft policy > Third-party policy

  1. Comprehensive: insures both the vehicle of the insured and the third-party.
  2. Third-party, fire, and theft: insures fire / theft of vehicle of insured and third-party vehicle / property damage.
  3. Third-party: insures third-party vehicle / property damage only, not the vehicle of the policyholder.
  4.  Compulsory third-party insurance: Legal liability for bodily injury of third-party.

Finance companies & general financiers

  1. Activity: Borrow funds (corporations, bank loans, domestic and international money / capital markets) to provide loans to customers.
  2. DO NOT accept deposits.
  3. Emerged during period of bank regulation.
  4. Assets:
  1. Loans to individuals.
  2. Instalment credit to retail stores.
  3. Lease financing.
  4. Loans to business.

Current make-up of finance companies

  1. Diversified: wide range of lending products.
  2. Manufacture-affiliated: such as to finance vehicle sold by parent company.
  3. Niche specialist: specialising in particular area of lending.

Building societies

  1. Mainly for lending to buy owner-occupied residential property.
  2. Accepts deposits i.e. authorised deposit-taking institution (ADI).
  3. Regulated by APRA with similar capital adequacy + liquidity requirements.

Credit unions

  1. Also an ADI. Accepts deposits and provides loan products to members with common bond of association.
  2. Regulated by APRA.
  3. Deposits accepted through authorised customer payroll deductions.

Export finance corporations

  1. EFIC: AU government agency that provides finance and insurance help to exporters.
  2. What do they do?
  1. Insure AU suppliers against non-payment.
  2. Guarantee trade finance to purchase AU G&S.
  3. Insure AU firms investing overseas against political risk.
  4. Lend to overseas borrowers.
  5. Make loans for export sales at concessional interest rates.

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