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Investment Industry

Updated August 26, 2021
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Investment Industry essay

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The Investment industry is a division of the Financial service industry that allows all members to help people invest and assist in raising capital within the financial market. One of the main aims in economic systems is the methodical assignment of scare resources to the most productive uses. The investment industry transmits the funds between suppliers of capital and the users of capital. It efficiently allocates these funds for the benefit of the economy as well as the supplier of capital. The industry meets financial needs by supplying and processing facts and figures regarding investment opportunities, they then bundle such opportunities so that it satisfies the needs of investors, additionally providing liquidity.

All of these benefits expand the likeliness and willingness of suppliers of capital to invest. Economic growth is promoted by capital which is put to more productive use which benefits the community. According to Tim Lemke in the article 10 largest investment management companies worldwide, 9 April 20202, on thebalance.com Three major companies involved in the investment industry worldwide includes: “BlackRock, the Vanguard Group and UBS Group” (Lemeke, 2020). Other investment companies include Sanlam, Deloitte, Allan Gray, and Old Mutual. Two main acts the investment industry should comply to include the protection on investment Act (2015) and The Collective Investment Scheme Control Act. The Protection of Investment Act (2015) protects investment according to the Constitution, with the aim to balance the rights and obligations of public interest and investors.

This act states that “Administrative decision-making processes must include the right to be given written reasons and administrative review of the decision consistent with section 33 of the Constitution and applicable legislation” (UNCTAD Compendium of Investment Laws, 2020: 5), therefore actuaries are responsible to comply to this section ensuring written reasons and administrative reviews are accurate and correct, giving a chance for fair decision making. It makes the work of actuaries harder since more aspects need to be considered before investments can be made. These aspects may influence the risk and willingness to invest in a project, thus affecting the actuary (this could improve the role that the actuary will play in the future of the investment industry).

The Collective Investment Schemes Control Act, Act No. 45 of 2002 manages administrative matters as well as the sale of collective investments. Fulfilling the role of managers such as investment managers, they must “administer a collective investment scheme honestly and fairly, with skill, care, and diligence and in the interest of investors and the collective investment scheme industry of segregation and identification.”(The Presidency, 2002: 7) therefore actuaries need to ensure that the information that is required to allow the investor to make an informed and fair decision is provided in an understandable form.

In addition, actuaries must be competent with their work in the industry (not just for professional and ethical reasons, but to be in line with the act) – to ensure that information is thorough and understandable. They must avoid conflict of interest which will provide the opportunity to give true and fair views. The Act requires actuaries to do more detailed work and research than already required by the Society. Actuaries’ role in the industry could improve however; they are an asset to the industry since they can translate investment data in understandable terms. One of the significant issues the investment industry is facing is the implications of regulatory changes.

The developing regulations impacting the investment industry has two influences on the performance of investment companies that include the following: The new regulations are anticipated to influence an investment bank or company’s financial performance through limiting their income-generating potential, placing a strain on their cost structure and decreasing the returns of their different business lines. According to the article about The New Basel III Framework (which is a regulation that affects the global investment industry) “these regulations are also expected to impact the operations and business models of the investment banks by enhancing their reporting requirements; putting constraints on their structuring, clearing, and trading of derivatives; requiring recovery and resolution plan; and putting limits on executive compensations while mandating more stringent governance standards.”(Shearman & Sterling, 2011).

The appearing regulations may reduce the investment bank and company’s income-generating potential, Strain on Financial Performance, Strain on the Cost Structure, Asset Holding, Funding Costs, Capital Costs, and likely decrease the return on investment of their business lines. One of the regulations that brought on issues in the industry is the Investment Act 22 of 2015. This act (the Protection of Investment Act of 2015) has been denounced nationally and internationally for its approach to some aspects.

“The European Union’s Regional Chamber of Commerce and Industry stated that foreigners are hesitant to invest in SA for fear that there will be a lack of protection over their investment” (Matthews, 2018: 1). The industry is thus grappling with various new and changing legislations, which combined and separately have an even greater impact on the industry. An investment product is a product presented to investors based on the primary aim of security or group of securities. These products are purchased with the expectation of earning a favourable return, provided they match required investment objectives.

According to James Chen, 2019 “Investment product is the umbrella term for all the stocks, bonds, options, derivatives and other financial instruments that people put money into in hopes of earning profits” (Chen, 2019). They commonly focus on a mix of capital appreciation and income generation. The type of product considered by an investor is generally dependent on their risk tolerance, market experience, and knowledge. The main products include stock, bonds, and derivatives. (Chen, 2019) “Stock investments represent equity ownership in a publicly-traded company.” (Chen, 2019) Companies issue stock as part of a capital-raising plan and the funds received will be used in the operations of the company.

Stock investments have varying growth prospects and are typically analyzed based on characteristics such as estimated future earnings and price-to-earnings ratios. Stocks may offer dividends adding an income payout component to the investment. (Chen, 2019) Bonds are offered by governments or corporations looking to raise capital. “Bonds pay investors interest in the form of coupon payments and offer full principal repayment at maturity.” (Chen, 2019) Investors can also invest in bond funds which include a portfolio of bonds managed by a portfolio manager. Bonds and bond funds are typically classified by a credit rating which offers insight on their capital structure and ability to make timely payments. (Chen, 2019) A derivative is a financial contract that attains its value from an underlying asset.

The buyer agrees to purchase the asset on a specific date at a specific price it may be considered a good investment if it provides leverage, diversification, flexibility, and the ability to hedge. It can be a very bad investment if it increases the risks involved or fails to provide the benefits. Actuaries fulfil many different roles in the investment industry. Two of the jobs actuaries do in the investment industry includes Investment Analysts and Investment Managers.

Investment analysts oversee research, create financial models, analyse company accounts, profit and loss sheets, and cash flow information and issue reports and informed guidance on stocks and bonds and other investment securities by interpreting complicated financial information. There are two well-defined recommendations made by investment analysts namely buy-sell recommendations. Some firms use the sell side of the market which means investment analysts generally give guidance for company agents who use this information to sell investments to the public. Then there are firms that operate on the buy-side of the market where analysts usually produce research and guidance for the company’s investment managers who use the information to buy and sell the stock. An investment manager makes investments in portfolios of securities such as company stock on behalf of clients under the investment objectives and parameters the client has described.

They provide investment figures and details as well as financial advice and they have knowledge of a wide range of investment and financial products, including trusts, stocks, bonds, and shares. They may handle all activities related to the administration and management of client portfolios, such as day-to-day buying and selling of stock and portfolio observing and monitoring transaction settlement, performance calculation and measurement, and client reporting. (Chen, 2019) Actuaries in the investment industry concentrate on strategy development and evaluation, as well as risk management. Their analysis is more strategic than deciding which bonds to buy or sell, etc.

Investments are global and thus actuaries in the investment industry lend a global perspective to companies that are connected in international financial services organisations. Investment actuaries also have the title of risk manager. They might also be the investment liaison – an individual who is responsible for making investment information more understandable. Investment actuaries are responsible for data analysis and synthesis (no matter their title). They may be responsible for analysing investment performance, development as well as pricing of financial products and the valuing products and assets. (Kenneth P, 2002: 2, 9)

Other professions who work in the investment industry include Investment Underwriters and Investment brokers. Investment underwriters take on financial risks for a fee. These underwriters particularly deal with companies who become public and want to sell company stock such as shares and bonds. This stock is known as initial public offerings (IPOs). Investment underwriters are accountable for establishing the price of a company’s IPO stock. They determine this through correspondence they receive from a potential investors.

The underwriter obtains a greater grasp of how well a company’s stock may fare as they discover the investor’s potential interest in investing in a specific company. After establishing the price for a company’s stock, these underwriters are also accountable to guarantee that a set amount of stock shares will be bought at a set price. Lastly, they then lay out an assurance that the investment bank will buy any of the company’s excess stocks. (Banton, 2019) Investment brokers act as an intermediary between buyers and sellers to manage portfolios of clients and provide investment guidance as well as manage client portfolios. They act as a vehicle between buying or selling stock. Investment brokers act as a vehicle because securities exchanges only welcome instructions from individuals or firms who are members of that exchange. Brokers provide the service of members of these exchanges.

Reference list

  1. About Finance and Investment, [online] Available at: https://www.actuaries.org.uk/practice-areas/finance-and-investment/about-finance-and-investment Accessed: 24 March 2020
  2. CAROLINE BANTON ,May 13, 2019, Investment Underwriter: Job Description, Role & Salary [online] Available at: https://www.investopedia.com/terms/u/underwriting.asp Accessed: 12 April 2020
  3. Ian Matthews, 16th Jul 2018, Protection of Investment Act becomes law and may deter foreign investment, [online] Available at: https://www.bbrief.co.za/2018/07/16/protection-of-investment-act-becomes-law-and-may-deter-foreign-investment/ Accessed: 5 May 2020
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  6. INVESTMENT ANALYST: JOB DESCRIPTION, [Online] Available at: https://resources.workable.com/investment-analyst-job-description Accessed: 22 March 2020 Investment Underwriter: Job Description, Role & Salary, [online] available at: https://study.com/articles/investment_underwriter_job_description_role_salary.html Accessed 21 April 2020
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