Tag Archives: Investment Management

Business Articles, Investing, Investment Vehicles

“Exchange Traded Fund” ETF Basics

Many Business professionals would be shocked to find out that a basic Exchange Traded Fund on the NASDAQ, New York Stock Exchange or on Japans 225 funds that make up the Nekkei Index are all either UIT’s or Open-Ended Funds (Mutual Funds). This article’s purpose is meant to identify and educate more executive business leaders about ETF’s you likely see daily listed on TV or on the many Stock exchanges.

Before we are able to begin listing the different key components that make a Exchange Traded Fund. It’s a good idea if I share some basics to help you understand the ETF’s are complex Financial Vehicles. And for today’s article we will be touching on UIT’s, and Open-Ended Funds. Because that is what the majority of ETF’s are! Unit Investment Trusts and Open-Ended Funds. Interesting stuff right? Lets breakdown the basics of UIT’s and Open-Ended Funds.

Unit Investment Trust “UIT”

What is a Unit Investment Trust? Great question! According to FINRA‘s Website:

“Unit investment trusts, or UITs, fall in the same category as mutual funds and closed-end funds. All three are investment companies, which means they pool money from many investors and invest it based on specific investment goals. The key difference with UITs, however, is once a UIT sets its portfolio, it remains the same for the life of the fund (barring any major corporate events, such as a merger or bankruptcy proceeding) and the term is fixed.”

Investment Company Act of 1940

The key to understanding ETF’s is the fact all ETF’s are Investment companies. If I share more descriptively. A ETF is a Pool of Money that has been legally established as an Investment Company. Now we need to dive slightly deeper into what is “The Investment Company Act of 1940?” The S.E.C. Securities and Exchange Commission. The S.E.C. states on it’s website :

Additionally The Act was signed in to law by President Franklin D. Rosevelt who felt the need for Regulation after the Stock Market Crash of 1929 destroyed so many and especially after the Great Depression left its mark on America’s tattered Finances. The biggest thing I would like to leave you with to know and recognize about the Investment Company Act of 1940 is the fact this Law is a regulatory framework for retail investment products and vehicles. Most importantly the Act leaves Fund Managers and Financiers with three categories of Investment Companies to make offerings. These Company categories are “Unit Investment Trusts” UIT’s, (Mutual Funds) Open-Ended Management Investment Funds and Closed Ended Management Investment Funds. It’s very important to discern the Requirements for Investment Companies are based on their categorization and offerings of Investment products or vehicles.

Open-Ended Management Investment Fund

All a Open-Ended Management Investment Fund really is in most cases is a Mutual Fund! It’s very simple. A collection of Securities or Investments organized into a Pooled Investment Vehicle as a Investment Company. Here are some facts about Mutual Funds. An Open-Ended Fund continuously makes new Shares available to the Public for purchase. These funds are professionally managed and often are able to negotiate and procure Investment vehicles at a discounted price that is not available to Retail Investors. Most Retirement Funds and Retirement Accounts prefer the ease and efficiency of Mutual Funds for Investment Vehicles. Open-Ended Funds can be Growth Oriented, or even Mixed with Alternative investments used as Products inside the Fund. And this is why they make a excellent vehicle for Exchange Traded Funds.

Exchange Traded Funds

By now I think your catching on to the fact Exchange Traded Funds can take many forms or basically be a Investment Company formed into one of three categories Unit Investment Trusts, Open-Ended Funds, Closed Ended-Funds. It is remarkable that when you breakdown the basics of “What a ETF is?” you find that most Exchange Traded Funds are a unmanaged UIT or a Mutual Fund. I do hope you learned some things reading this week’s article. And in conclusion stay tuned! I feel it’s only fair for me to revisit expand on Closed-Ended Investment Management Companies in the near future. But for today? After doing some heavy studying. I felt it was really interesting to write about the fact that 70% of the ETF’s in the OTC and Big Blue Chip Markets? Are UIT’s and Open-Ended Funds are just Mutual Funds. I hope you found this article interesting and educational. This was something I felt could be useful and I felt it would make for a great little article. In conclusion. I would say, stay tuned. Big NEWS next coming week. Thanks for stopping by. Please feel free to contact me. HERE.

Godspeed

JS

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Business Articles, Investing

Howard Marks 6 Investing Principles

Recently, I was listening to Oaktree Capital’s Co-Founder Howard Marks, it was clear I needed to pull up my notes and write down these 6 Investing Principles that give Oaktree’s Team an Investing Edge in the Market.

Like most value investors we all know the steps of using Benjamin Graham’s strategy from the Book Intelligent Investor when valuing a Stock or Investment that is trading at a steep discount. Well like Graham, Mr. Howard Marks puts his twist and strategy to work while adhering to a few universal basics that Graham has taught us all as Value Investors. It is said that when Mr. Marks writes an Annual Letter, or his famous Yearly Memo and releases it, Warren Buffett stops what he is doing and reads it. 

During an interview recently, Mr. Marks shared “I wrote my yearly memo for nearly twelve years and knew that not many people would read it, but one day after the fifteenth year or so, it basically became an overnight success”. That gives me hope that my little Investment Blog might one day be as interesting as Mr. Howard Mark’s Annual Memos.  

These Principles Guide Our Investment Process

  • Risk Control: Managing risk should be an Investment Management’s Greatest Investment Objective. Without managing risk through extensive diligence and heavy research and planning, our investment thesis may be unproven. 
  • Consistency: When thinking about making Bad Investments to knocking one out of the park like a baseball player, an Investor must be consistent with the performance of their investments. On a scale of 1-10, it’s great to be hitting home runs with Investments that always win, but when things go bad, and they often do with unforeseen risks with Investments, it’s better to be averaging a success rate range in the upper middle of 3-6 max, and not allowing the bad beats of Bad Investments to bring down your Median Average of Consistency. This is very important.  
  • Be selective and look inside the less efficient markets for opportunities: Most markets are highly efficient, but there are places within markets where efficiency is lacking. Those are the spaces where you will be able to apply the Value Investor Graham Basics and WIN! Finding Investments that are “cheap” and look over-leveraged, may be exactly what you have been looking for to apply the skills we have learned over the years. Marks says you will find deals in Emerging Markets where information is not as transparent and available.   
  • Focus on a high degree of Specialization: Mr. Marks says, “Our people at Oaktree do a few things well. We are not Generalists”. 
  • Investment decisions are not driven by Macro Forecasts: Don’t allow the wind blowing over the markets to catch your sails and take you off course to faraway lands. We are Fundamental Analysts; we use the Bottom-Up Strategy. 
  • We are not Market Timers: Mr. Marks emphasizes, “If it’s cheap today, we buy it! We don’t need to wait six months and see if it will be cheaper. That makes no sense”. I tend to agree with Mr. Marks. When you’re looking for investments, your thesis is proven correct or it’s not. Apply the Rules and Skills we have been taught. 

Did you catch my last Article on Commercial Real Estate HERE.

Additional notes from Mr. Marks that are relevant to Investment Management and Investing for Success:

  • “You can’t predict, but you can prepare”. 
  • “Having a large number of Good Investments is our Mantra”. 
  • “Find good companies with correctable Bad Balance Sheets”. 
  • “Distressed Debt holds opportunities”. 
  • “Find good companies that have fallen on hard times”. 
  • “Look for companies with good management, with Too Much Debt”. 
  • “How do we fix this?” 
  • “Our Credit committee during the bankruptcy process can fix and raise the value. We receive profits from our efforts”. 
  • “We reject onerous Debts”. 
  • “We are not turnaround artists”. 
  • “All we focus on is Senior Secured Debt Obligations”.

In the end, our team avoids Losers and Bad Companies! 

In Conclusion

In conclusion to this week’s post on Investing Philosophy, if you adhere to and adopt the unique and proven principles in this post for your own purposes, you will likely be happy with the results. I do hope you learned something from Mr. Howard Mark’s Investing Principles. 

Feel free to share today’s article. With that, I thank you for stopping by and reading. And I hope you will come back and visit my Investment Blog soon.

Godspeed.

JS

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