INVESTMENT COMPANIES

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

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Public offering (underwriting) of securities.
Trading of securities.
Private placement of securities.
Securitization of assets.
Mergers & Acquisitions.
Merchant banking.
Trading and creation of derivative instruments.
Money managemet

The functions of the inv. Bankers;
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Advising the issuer on the terms and timing of the offering.
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Buying the securities from the issuer.
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.

 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.

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.

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

 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.

 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.

 Finding M&A candidates
 Advising acquiring companies or target companies with respect to price and nonprice terms of exchange.
They receive an advisory fee (retainer) based on the percentage rate of selling price.

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.

 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.

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

 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

Activity
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Trading activities
IPO activities
Repo and reverse repo activities
 Portfolio management
Minimum Equity Capital
 Required X Amount of
New TL
 Half of above
 Same as above
 Investment counseling
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40 percent of what is required for trading of securities
10 percent of what is required for trading of securities
 Derivative businesses  Same as what is required for trading activities

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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
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Treasury bills/notes
Bankers’ notes and bank guaranteed notes
IOUs of the following public sector entities
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Turkish Privatization Board
Housing Administration
Boroughs and counties and their affiliates
Promissory notes listed and traded at an exchange
(including asset-backed securities)

 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.

 Inv. Principles:
 No misleading recommendation can be given,
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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.

 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.

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Port. Mang. Companies must;
 not give any return guarantees to the customers,
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 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.

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 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;
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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.

 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.

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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.

The 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.

 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.

 Mutual Funds
 Closed-end Funds
 Unit Investment Trusts (UITs)
 Real Estate Inv. Trusts (REITS)
 Real Estate Mortgage Conduits (REMICs)

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Risk reduction through diversification.
Lower costs of contaracting and processing information.
Professional portfolio management.
Liquidity.
Variety.
A payment mechanism.

 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)

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Another clasification;
 Passive funds (Indexed funds)
 Active funds.
Acc. to market capitalization;
 Small cap
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Mid cap
Large cap
Acc. to style;
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Value
Growth
Acc. to sector specialization;
 Technology
Utilities
 Go on....
Funds in funds.

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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 “openend investment companies”.
Each mutual fund has a manager or investment advisor.

 Long-term growth
 High current income
 Preservation of principal

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Stock funds;
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Equity income funds (conservative)
Growth funds-value funds (mainstream)
Small company funds (aggressive)
International funds (aggressive)
Bonds (by maturity);
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Short-term bonds
Intermediate bonds
Long-term bonds
Bonds (by creditworthiness of issuers)
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Government bonds
Corporations
High yield corporations
Investment grade
Asset Allocation funds,

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 Purchased its shares from the fund.
Redeemable
Shares are being sold on a continues basis
 More liquid securities
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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

 Both funds are managed by seperate entities known as “investment advisors” that are registered by the
SEC.
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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.

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Have a termination date
Make a one-time public offering of fixed amount of units
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 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)
Never expire
No fixed amount.
Diversification is essencial . It must hold a min. Nr. of diff.
Securities
 Can not buy or sell securities frequently.
 Does not have an inv. Advisor
 Can sell and buy securities frequently.
 Have an inv. advisor
 You can buy or sell at any time
 Buy or sell at the end of the trading day.

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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)

 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

 They are pass-through securities.
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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.
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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
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Federal National Mortgage Association; Fannie Mae.

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

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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”.

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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;
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Quantom Fund (George Saros)
L-T Credit Management

 According to the CM Law No: 2499/32
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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)

 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.

 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.

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If at least 51% of the portfolio consists of;
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 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 ;
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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.

 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.

Management principles must be as follows;
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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
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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

 There are 2 types of Inv. Trusts in Turkey;
 Real Estate Inv. Trusts
 Venture Capital 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 trusts are banned from;
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 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

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Real estate investment trusts are free to;
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 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
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 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

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

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 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

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

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