4. WEEK

INVESTMENT COMPANIES

INVESTMENT BANKING FIRMS

In U.S. Inv. Banking activities are performed by; Securities firms and Commercial banks

Security firms; Distribute newly issued securities, Involved in secondary market as market makers and

brokers.

Inv. Banking firms are highly leveraged companies.

Revenues: Commissions, fee income, spread income, and principal.

Activities of the Inv. Banking Firms

1. Public offering (underwriting) of securities.2. Trading of securities.3. Private placement of securities.4. Securitization of assets.5. Mergers & Acquisitions.6. Merchant banking.7. Trading and creation of derivative

instruments.8. Money managemet

1. Public offering (underwriting) of Securities

The functions of the inv. Bankers;

1. Advising the issuer on the terms and timing of the offering.

2. Buying the securities from the issuer.

3. Distributing the issue to the public.

Best Effort Selling: The inv. Banking firm agrees only to use its expertise to sell the securities. It does not buy the entire issue from the issuer.

Underwriting: Inv. Banking firms buys the securities from the issuer and accepts the risk of selling the securities to investors.

-Stand-by underwriting

-Firm-commitment (Bought deal)

Underwriting fee (Gross spread, Underwrite discount):The difference btw the price paid to the issuer and the price at which the inv. banking firms reoffers the securities to the public.

Underwriting Syndicate:Underwriting transaction involves the risk of capital loss. To share this risk, an inv. banking firm puts together a group of firms to underwrite the issue.

Gross spread is divided among the lead underwriter(s) and the others. The lead underwriter manages the deal (runs the book for the deal)

To increase the potential investor base, the lead underwriter puts together a selling group. This group includes the underwritring syndicate and other firms not in the syndicate.

Privatization: Inv. Banking firms may assist in offering the securities of gov-owned companies to private investors.

2. Trading of Securities

Inv. Banking firm takes a principal position in a transaction.

Revenue from this activity;

1. Bid-ask spread. The diff. Btw the price at which the inv. Banking firm sells the security and the price paid for securities.

2. Appreciation of the price of the securities held in inventory.

The strategies of the traders to generate revenue;

1. Riskless arbitrage; If price differences occur in various markets for the same security, investors can make profit after transaction costs by selling the security in the market where it is priced higher and buying it in the market where it is priced lower.

2. Speculation: occurs when the trader positions the capital of the investment banking firm to take advantage of a specific anticipated movement of prices.

3.Private Placement of Securities:

Inv. Banking firms place securities with a limited nr. of institutional investors such as insurance companies, inv. companies and pension funds.

4.Securitization of assets

It is the issuance of securities using a pool of assets as collateral.

Asset-backed securities: Inv. Banking firms work with corp. to either securitize a wide range of loans and receivables or buy loans and receivables in the market and issue securities backed by them.

5.Mergers and Aquisitions

M&A activities include; Leveraged buyouts (LBOs): Assisting

acquiring companies in obtaining the necessary funds to finance a purchase.

Restructuring&recapitalization of companies Reorganization of bankrupt and troubled

companies.

Their M&A activities;

Finding M&A candidates Advising acquiring companies or target

companies with respect to price and non-price terms of exchange.

They receive an advisory fee (retainer) based on the percentage rate of selling price.

6.Merchant Banking

It is an activity of the inv. Banking firm when it commits its own funds by either taking an equity interest or creditor position in companies.

7.Trading and Creation of Derivative Instruments Futures, options, swaps, forwards are used to

control the risk of an investor’s portfolio. They are also used to protect an inv. Bank’s

own position in transactions.

8.Money management

Inv. Banking firms create subsidiaries that manage funds for either individual and institutional investors (pension funds).

In Turkey According to the CM Law No: 2499/3i

Financial Intermediaries (Aracı Kuruluşlar) Commercial Banks (Ticari Bankalar) Brokerage firms (houses) (Aracı Kurum)

The Activities of the Financial Intermediaries (Brokerage firms and Commercial banks) in Turkey Primary Market Activities (IPOs) Secondary Market Activities Repo and Reverse Repo Transactions Investment Counseling Portfolio Management Derivative Transactions Margin Transaction, Short-selling and

Borrowing and Lending

Min. Capital Requriment for the Brokerage FirmsActivity Trading activities IPO activities Repo and reverse repo

activities Portfolio management

Investment counseling

Derivative businesses

Minimum Equity Capital Required X Amount of

New TL Half of above Same as above

40 percent of what is required for trading of securities

10 percent of what is required for trading of securities

Same as what is required for trading activities

REPOS-REVERSE REPOS

The borrower sells securities and at the same time contracts to buy them back later at the same price plus accrued interest at the agreed rate.

It can be overnight and term. Repo securities are as follows;

Treasury bonds Treasury bills/notes Bankers’ notes and bank guaranteed notes IOUs of the following public sector entities

Turkish Privatization Board Housing Administration

Boroughs and counties and their affiliates Promissory notes listed and traded at an exchange

(including asset-backed securities)

INVESTMENT COUNSELLING

Giving advice and interpretations, verbal and in writing, to customers on; CM Instruments, Issuers Mergers and Takeovers Financing needs of the corp.

Inv. Counselling must be based on a written contract.

INVESTMENT COUNSELLING

Inv. Principles: No misleading recommendation can be given, Inv. recommendations must be properly

documented, The customers’ financial status must be taken into

consideration, No guarantee can be given on inv. returns, Interest based conflict in all cases must be

avoided, Not free using information gathering for their own

inv. purposes without initially supplying them to their customers.

PORTFOLIO MANAGEMENT

These companies are established with a view to managing securities portfolios of customers on proxy basis and on written agreements.

Port. Mang. Companies are also entitled to run mutual funds and inv. trusts.

PORTFOLIO MANAGEMENT

Port. Mang. Companies must; not give any return guarantees to the customers, document the investment decisions for the

customers, clarify risk/return preferences of customers, show their effort in handling the customers’

portfolio of securities be fair among their customers.

The CMB regulations require that port. mang. may be; Given by experts with knowledge and proper

education and experiance.

Margin Trading is the use of credit to purchase securities You can borrow up to 50% of the marginable securities by using your

own assets as collateral. (Initial Margin) Benefits;

Increase the purchaing power of the investors. Risks associated with margin borrowing;

The value of the securities you deposited or purchased on margin may decrease.

If the equity in your account falls below the min maintenance requirements (maintanence margin), a maintanence call will result.

If the maintenance call occurs, you will be required to increase the equity up to the min. maintenance levels by immediately deposited additional funds or marginable securities.

Short-selling

Sale of the borrowed securities that are not owned .

It is required from the customers to deposit at least 50% of the deal for short-selling in cash or in securities.

Marginable securities can not be used as equity in short sale deals.

Borrowing and Lending Activities

Borrowed securities are lent by the lender to the borrower with a view the borrower makes short-sale and return them in a certain time span to the lender.

Banks and brokerage firms may lend securities either from their own or customers portfolios.

Customers who sign margin aggrements also routinely sign loan-consent form.

Margin Trading- Short-selling and Lending-Borrowing ActivitiesThe communiqué of the CMB stipulates that; Margin trading rates be limited to half of the net-worth

of banks and brokers Total of securities on credit, short sales, securities on

borrowing be limited to twice as much as their net worth

Each such deal to a single customer not exceed 10 percent of the net worth of banks and brokers.

OTHER INVESTMENT COMPANIES These are financial intermediaries that sell

funds to the public and invest the proceeds in a diversified portfolio of securities.

This portfolio is managed by the investment company on the behalf of its shareholders.

TYPES OF INVESTMENT COMPANIES in U.S Mutual Funds Closed-end Funds Unit Investment Trusts (UITs)

Real Estate Inv. Trusts (REITS) Real Estate Mortgage Conduits (REMICs)

Economic Motivation for Funds

1. Risk reduction through diversification.

2. Lower costs of contaracting and processing information.

3. Professional portfolio management.

4. Liquidity.

5. Variety.

6. A payment mechanism.

Types of Funds by Investment Objective Main categories;

Stock funds Bond Funds MM Funds Others.

Other clasification; U.S only funds International funds (No U.S) Global funds (U.S and International)

Another clasification; Passive funds (Indexed funds) Active funds.

Acc. to market capitalization; Small cap Mid cap Large cap

Acc. to style; Value Growth

Acc. to sector specialization; Technology Utilities Go on....

Funds in funds.

MUTUAL FUNDS

Funds comprised of various types of securities. Such as common stock, bonds, MM instruments and combination of them.

Since each investor may sell their shares or buy new shares each business day, they are called as “open-end investment companies”.

Each mutual fund has a manager or investment advisor.

Common objective of the mutual funds

Long-term growth High current income Preservation of principal

Types of mutual funds in U.S Stock funds;

Equity income funds (conservative) Growth funds-value funds (mainstream) Small company funds (aggressive) International funds (aggressive)

Bonds (by maturity); Short-term bonds Intermediate bonds Long-term bonds

Bonds (by creditworthiness of issuers) Government bonds Corporations High yield corporations Investment grade

Asset Allocation funds,

Differences btw Open-end Funds (Companies) (Mutual Funds) and Closed-end Funds (Companies) Purchased its shares

from the fund. Redeemable Shares are being

sold on a continues basis

More liquid securities

Traded in the secondary market.

Not redeemable They do not

continuesly offer their shares for sale

They are permitted to invest in a greater amount of “illiquid” secutities than mutual funds

Similarities of the open-end and closed-end funds Both funds are managed by seperate entities known

as “investment advisors” that are registered by the SEC.

Both can come in many varities. They are subject to SEC registration and regulation

are are subject to numerous requirements imposed for the protection of investors.

Differences btw Unit Inv. Trusts (UITs) and Mutual Funds

Have a termination date Make a one-time public offering of

fixed amount of units

Buy and hold a fixed portfolio of stocks, bonds etc. concentrated in a particular industry. Have shares of stocks of a few companies. (Dogs of Dow Approach)

Can not buy or sell securities frequently.

Does not have an inv. Advisor

You can buy or sell at any time

Never expire

No fixed amount.

Diversification is essencial . It must hold a min. Nr. of diff. Securities

Can sell and buy securities frequently.

Have an inv. advisor

Buy or sell at the end of the trading day.

Similarities of the Mutual Funds and UITs Their shares are both redeemable. Closed-end funds are not

redeemable. They must both calculate the NAV at least once every business

day after the major US exchanges are closed. Closed-end funds are not subject to this requirement.

The share price of them are based on; Per share NAV+fees at purchase (sales load, purchase

fees) The price the investors receive at redemption;

app. NAV-fees (deferred sales loads or redemption fees)

Exchange-traded funds in US

SPDRS, Spider, Spyders Traded as SPY on AmEx. Tracks S&P 500 index

Qube QQQ on AmEx 2.5% of the NASDAQ 100 Index

DIAMONDS DIA on AmEx 1% of the DJIA

REITs and REMICs They are pass-through securities.

REITs specializes in investing in mortgages, property or real estate company shares offering their investors an apportunity to participate in real estate profits and tax benefits

REMICs must invest only in mortgages not real estate. There are 3 institutions that sell these securities guaranteed

and issued by the government; Government National Mortgage Association, Ginnie Mae Federal Home Loan Mortgage Corporation; Freddie Mac Federal National Mortgage Association; Fannie Mae.

PENSION FUNDS

It is a fund established by private employers, govenments, or unions for the payment of rertirement benefits.

HEDGE FUNDS (Private Limited Partnership) Private inv. tool that invests all or most of their assets in publicly

traded securities. Make inv.s in CS, bonds, commodities and currencies and using

some tools such as leverage, derivatives and arbitrage. Structured as limited partnerships. They are unregulated. Hedge fund fees (management fee or performance fee); US

hedge funds charge the standard “one-to-twenty”.

HEDGE FUNDS

Min inv. For one share is 250,000 $ Accredited investor; professional, sophisticated,

institutional investor who has net worth of 1 million $ or more.

Qualified purchasers; super accredited investors who has net worth of 5million $ or more.

The most famous hedge funds are; Quantom Fund (George Saros) L-T Credit Management

CM Entities in Turkey

According to the CM Law No: 2499/32 Capital Market Institutions (Sermaye Piyasası

Kurumları) Brokerage Firms Mutual Funds (Yatırım Fonları) Investment Trusts (Yatırım Ortaklıkları)

Real Estate Inv. Trusts (Gayri Menkul Yatırım Ortaklıkları)

Venture Capital Inv. Trusts (Risk Sermayesi Yatırım Ortaklıkları)

Mutual Funds in Turkey

Investors receive participation certificates from their investments into these funds in Turkey. It is called “shares” in U.S.A.

Only banks and brokerage firms can set up mutual funds under some regulations. Funds are preserved on fiduciary basis. Funds are run on proxy basis.

Types of the Mutual Funds in Turkey A Type Fund: These funds are accounted for

by at least 25% stock of companies that are founded and operate in Turkey.

B Type Fund: These funds are “the other types” than A type funds that do not have any limitations.

Names of the Mutual Funds in Turkey If at least 51% of the portfolio consists of;

bonds and bills, it is called as bonds and bills fund common stocks, it is called as common stock fund foreign securities, it is called as foreign securities fund gold and other precious metal, it is called as gold and other precious metals fund the securities of the main company and its sub-companies, it is called as group

fund If the whole fund consist of ;

At least two of the following instruments; common stock, bond, bills, gold and other precious metals and other capital market instruments and also the value of investment in each instrument at most 20% of the fund value, it is called as mixed fund

financial instruments which has at least 90 days maturities, it is called as liquid fund.

If the 80% of the portfolio consist of the securities of an index, it is called as index fund.

INVESTMENT TRUTS in TURKEY They are set up as joint stock companies on

registered capital basis with a view to running portfolios of securities or gold or other precious metals.

They do not allow to control the equity and management of the corporation they buy.

INVESTMENT TRUTS in TURKEYManagement principles must be as follows; Any involvement into stocks of portfolio corporations more than 9% is prohibited No more than 10% of their portfolio can be invested into securities of any corporations Investment trusts are not free to issue preference shares, non-voting shares, and any debt instrument with

maturity more than 360 days These trusts can only purchase real estate as many as their activities require, and the total may in no case

exceed 5 percent of their total assets and/or 10 percent of their net worth They have to conduct their business through exchanges They are not free to buy assets for any value above market ranges Investment trusts are not free to use their assets as collateral or chattel mortgages (the only exception is

that 5 percent of their portfolios can be given as collateral in securing credits in their favor) No investment into the shares of other investment trust or participation certificates of mutual funds are free

with the exception of venture capital trusts Investment into overseas securities can only be made so long as there is reference to this extent in their

articles of association

INVESTMENT TRUTS in TURKEY There are 2 types of Inv. Trusts in Turkey;

Real Estate Inv. Trusts Venture Capital Inv. Trusts

Real Estate Inv. Trusts

Set up or transformed from an existing company with a view to making inv.s in Real estates Real estate-backed securities Real estate projects

with the proviso that minimum 25 percent of shares are owned by a “leader entrepreneur”.

Real Estate Inv. Trusts

Real estate trusts are banned from; taking deposits engaging in commercial, industrial and agricultural activities engaging in other capital market activities other than those real estate

related deals assuming construction responsibilities, and employing workforce or

equipment for this purpose (instead, builders do these on contractual basis)

running estates on their own (instead, estate agents are employed) providing project services, financial feasibility, and management

services in this context

Real Estate Inv. Trusts

Real estate investment trusts are free to; invest into real-estate-related securities invest into other capital market instruments invest into reverse repo agreements invest into lands and real estates of all kinds sell real estates in their portfolios invest into real estate rights engage in build-operate-transfer projects let the estates in their portfolios out engage in forward, swap deals; write options purchase futures contracts with the exception of commodities futures

Real Estate Inv. Trusts

And real estate trusts are not free to; invest into gold and precious metals invest into unlisted securities invest into commodities sell securities short, nor can they be involved in capital market

transactions on borrowed securities engage in speculative derivatives pay commission in excess of three percent of the assets they

purchase (legal payments are excepted) invest into any properties that are not freely disposed

Venture Capital Inv. Trusts

public corporations set up with registered capital for the sole purpose of investing into ventures in order to gain capital gains, dividends, and interest.

“Ventures” are described by the CMB as corporations (existing or to be set up); in funding needs with high expectations

Venture Capital Inv. Trusts

They make inv.s in; IPOs of ventures Debt instruments of ventures Securities traded at secondary markets Current values of reverse repo agreements

Venture Capital Inv. Trusts

They are banned from; lending activities taking deposits engaging in commercial, industrial and agricultural activities

engaging in any other capital market activities investing into gold and other precious metals futures and options deals short sales and create positions on borrowed securities owning real estate more than their activities warrant