Investment companies also known as asset management companies. These companies manage the funds of individuals, state local governments and businesses. Also the companies are reimbursed for the fees charged by them for the service. Fees are linked to the amount managed for the client as well as the performance of the assets managed in some cases. Some asset management companies are subsidiaries of commercial insurance companies, banks and investment banking firms.

Basically a GIC is insuring the policyholder that he will get a guaranteed interest rate over the life of the policy against the risk of interest rates falling. In case of annuity where the policyholder pays a single premium for the policy and the life insurance company agrees to make periodic payments to the policyholder over time, the source of all this information is the Insurance Information Institute.

Account types, businesses and clients of asset management companies are included in the following lines

  • Regulated investment companies
  • Exchange Traded Funds
  • Hedge funds
  • Separately managed accounts
  • Pension Fund

Regulated investment companies

Regulated Investment Companies RICs are financial intermediaries that sell shares to the public and invest the money in a portfolio of various securities. Asset management companies are hired to manage the portfolio of RICs. Various securities laws regulate these institutions.

There are three main types of RICs managed by asset management companies.

  • Open-end funds
  • Closed-end funds
  • Unit Investment Trust (UIT)

Each share sold represents a proportionate interest in the portfolio of securities managed by the RIC on behalf of its shareholders. Additionally the value of each share of the portfolio is called the net asset value and is calculated as follows:

NAV = market value of portfolio − number of liabilities/shares

For example, suppose a RIC with 20 million shares outstanding has a portfolio with a market value of $430 million and liabilities of $30 million. The NAV is

NAV = $430,000,000 - $30,000,000/20,000,000

NAV is determined only at the end of the trading day.

Mutual funds

Open-end funds, commonly referred to as mutual funds, do not have a fixed number of fund shares. All new investments in the Fund are purchased at NAV and all redemptions from the Fund are purchased at NAV. Investing more than withdrawing during the day increases the total number of shares in the fund.

For example, assume that a mutual fund portfolio at the beginning of a day is valued at $300 million, has no liabilities, and has 10 million shares outstanding. Hence the NAV of the fund is $30. Assume that investors deposit $5 million into the fund and withdraw $2 million during the trading day, and that the prices of all securities in the portfolio remain constant. A $3 million net investment in the fund means that 100,000 shares were issued ($3 million divided by $30). There are 10.1 million shares after the transaction, giving the portfolio a market value of $303 million. So the NAV is $30 unchanged from the previous day.

Instead the NAV will change if the value of the portfolio and the number of shares change. However at the end of the day the NAV will be the same whether the net shares are added or redeemed. Assume in the previous example that the value of the portfolio increases to $320 million at the end of the day. Because new investments and withdrawals are priced at the end-of-day NAV, which is now $32, the $5 million new investment will accumulate to $5 million ÷ $32 = 156250 shares, and redeeming $2 million will reduce the number of shares to $2 million ÷ $32 = 62500 shares. Thus at the end of the day the fund has 10 million + 156250 − 62500 = 10093750 shares. Because the portfolio has a total value of $323 million ($320 million plus $3 million in new investments), the NAV at the end of the day is $32 and transactions are not affected.

Closed-end funds

Closed-end funds do not issue additional shares or redeem shares like open-end funds. That is, the number of fund shares is fixed on the number sold at the time of issue. Instead investors who want to buy shares or investors who want to sell their shares must do so in the secondary market.

Supply and demand in the market in which the fund is traded determines the price of shares of a closed-end fund. Hence the fund share price may trade below or above the NAV. Shares trading below NAV are said to be trading at a discount, while shares above NAV are trading at a premium. Investors dealing in closed-end fund shares are required to pay brokerage commission at the time of purchase and at the time of sale.

Unit Investment Trust

There is a third type of RIC called Unit Investment Trust or UIT. This type of RIC is pooled but not actively managed. A unit investment trust has a limited life and a fixed portfolio of investments.

Cost to investors

Investors in RIC-Regional Investment Corporation bear two types of costs.

The first is a shareholder fee commonly called a sales fee, which is a one-time fee. And second is the annual fund operating expenses commonly called expense ratio which includes the expenses of the fund. The largest expense component of the expense ratio is the management fee, also called investment advisory fee, which is the annual fee paid to the asset management company for its services.

RICs are available with different investment objectives and invest in different asset classes such as stock funds, bond funds and money market funds. These are passively managed and actively managed funds. Passive funds, commonly referred to as index funds, are designed to replicate a market index, such as the S&P 500 stock index in the case of common stocks. In contrast, fund advisors with active funds attempt to outperform indices and other funds by actively trading fund portfolios.

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