Asset Management

1. Asset Management Lecture One

2. Introduction • Book: • Investments 8th edition by Bodie, Kane and Marcus • Evaluation: • Homework • Three cases • Quizzes • Final exam 50% • Office hour: Wednesday 14:00 to 15:00

3. Introduction • Theories • Practices • Institutional knowledge • Cases

4. Outline for today • What is asset management? • Asset classes • Asset management process

5. Asset Management • Asset management: to meet specified investment goals for the benefit of the investors. • financial assets • real assets (real estate, commodities) • Investors • institutions (insurance companies, pension funds, corporations etc.) • private investors • direct via investment contracts • collective investment schemes (e.g. mutual funds) .

6. Global fund management industry, 2007(values in US$ trillion)

7. Global (conventional) fund management industry by country

8. Global (conventional) fund management industry by country

9. 15 Largest Asset Management Firms by assets under management as of 31 December 2006.

10. Asset classes • The money market • T bills • Certificates of deposit • Eurodollars • Federal funds

11. borrowing by U.S. banks from the Federal Reserve through Dec. 2007:

12. borrowing by U.S. banks from the Federal Reserve through Dec. 2008:

13. Asset Classes • Money market • Bond market • T notes and T bonds • International bonds • Municipal bonds • Corporate bonds • Mortgage-backed pass-through securities • Mortgage related agencies • Federal National Mortgage Association, Fannie Mae • Government National Mortgage Association, Ginnie Mae

14. S&P 500 Stock Price 1985-2009

16. Global indices 2008

17. Best vs. worst performing stock markets 2008

18. Asset management process • Planning with the client • Investor objectives, constraints and preferences • Execution by the asset manager: • Asset allocation • Risk and return, effects of diversification (views on inflation, growth, etc.) • Security selection • Market efficiency: can we beat the market? (private info) • Execution • How and when do you trade? (trading speed, trading costs) • Evaluation: • What are the risk and the return of the portfolio? • Does the manager underperform or outperform?

19. Planning

20. Objectives

21. Constraints

22. Asset allocation • Specify asset classes to be included in the portfolio • Specify capital market expectations • Derive the efficient market frontier • Find the optimal asset mix

23. Retirement planning models • Retirements consumption depends on life expectancy. • Life cycle of risk tolerance • Ballpark Estimate Model http://www.choosetosave.org/ballpark/

24. Ballpark Estimate Model • Assuming a constant real interest rate of 3%. • For example, let’s say Jane is a 35-year-old woman with two children, earning $30,000 per year. • Jane has determined that she will need 70% of her current annual income, i.e. $21,000, to maintain her standard of living in retirement. • Jane would then subtract the income she expects to receive from Social Security ($12,000 in her case) from $21,000, equaling $9,000. This is how much Jane needs to make up for each retirement year. • Jane expects to retire at age 65 and if she is willing to assume that her life expectancy will be equal to the average female at that age (86), she would multiply $9,000 by 16.4 for a result of $147,600 • Jane has already saved $2,000 in her 401(k) plan. She plans to retire in 30 years so she multiplies $2,000 x 2.4 equaling $4,800. She subtracts that from her total, making her projected total savings needed at retirement $142,800. • Jane then multiplies $142,800 x .020 = $2,856. This is the amount Jane will need to save in the current year for her retirement (it is assumed the annual contribution will increase with inflation in future years).