Questions from chapters in ActEd

[Adithyan]

This is in Pg 9 of Acted notes (Economic influences on investment markets)
As well as affecting particular maturities, the choice of which bonds to sell may affect
yields on conventional bonds and index-linked bonds differently. For example, an
announcement to increase the use of index-linked bonds might lead to lower yields on
conventional bonds. (I don't understand what the bold lines mean)


In Page 2 of ActEd (Other influences on investment markets)
The level of cashflow in to, and also out of, the main financial institutions has a major
impact on the demand for assets and hence market prices. The level of net cashflow
itself will primarily reflect the level of saving throughout the economy, whilst the
balance between the different institutional investors will reflect the relative popularity
of the savings vehicles that they provide. This cashflow may be invested in short-term
money market instruments whilst the investor determines the appropriate destination for
its long-term investment.
I don't get the line where they talk about the money market instruments in the paragraph above.

Final question
How could pooling of expenses and expertise be a reason for employer financing benefits? (This was in Benefit overview and providers of benefits chapter)

Kindly assist!

Thanks in advance

 

[Helen Evans]

Hi Adithyan

A few thoughts on this ...

Re Page 9 of Economic influences on the investment markets

Increased use by the government of IL bonds is likely to suggest that the government expects inflation to be low / controlled in future so the cost of servicing such IL bonds will be low and predictable. If inflation is expected to be low then conventional bonds do not need to offer such a high yield to protect against inflation risk. (We can think about the expression for required return on a conventional government bond = risk-free real rate + expected inflation + inflation risk premium).

Re Page 2 of Other influences on the investment markets

The idea here is that institutional cashflow invested in the markets influences asset prices. However, it only directly influences classes such as bonds, equity, property to the extent it is actually invested in those classes, and it may be for periods of time that the money is instead held as cash and other short-term money market instruments if investors feel other assets are expensive / they are waiting for arbitrage opportunities / they are unclear as to the long-term strategy that they want to follow.

Pooling of expenses and expertise

I would view pooling of expenses and expertise as being a "role of the employer" (which is the heading of the section in the notes) rather than a reason. Ie the employer can fulfill a role of enabling employees to have cheaper benefits via economies of scale in terms of expenses and give access to expertise.

I hope this helps.

 

[Adithyan]

Thank you very much for your help!
I have further questions

In pg 7 of valuation of individual investments:
The counter argument is that using another valuation method in an attempt to identify the intrinsic worth of an asset involves an investment call as to the direction the market in that asset (or class of asset) will move.

What is the investment call they are referring to here?

I dont understand the valuing portfolios of shares in page 10
Typically the valuation of a portfolio of ordinary shares would be carried out by
assuming the shares were swapped for a holding in an index.
Here the details of the actual portfolio are ignored. The market value of the total actual
portfolio is assumed to be invested in a notional portfolio consisting solely of a holding
in a specified index. It is the value of this notional portfolio that is calculated.
Does the specified index that is being used help have the same investment mixture as the portfolio that needs to be valued?

Kindly help!

Regards
Amarnath