FINANCIAL INTERMEDIARIES

A portfolio is a collection of financial investments like stocks, bonds, commodities, cash, and cash equivalents, as well as their fund
counterparts.

Stocks and bonds are generally considered a portfolio's core building blocks, though you may grow a portfolio with many different types
of assets—including real estate, gold, paintings, and other art collectibles.

Diversification is a key concept in portfolio management.

A person's tolerance for risk, investment objectives, and time horizon are all critical factors when assembling and adjusting an investment
portfolio

Portfolio management is an important financial skill for active investing.

Diversification is a strategy that mixes a wide variety of investments within a portfolio in an attempt to reduce portfolio risk.

Diversification is most often done by investing in different asset classes such as stocks, bonds, real estate, or cryptocurrency.

Diversification can also be achieved by buying investments in different countries, industries, sizes of companies, or term lengths for
income-generating investments.

Diversification is most often measured by analyzing the correlation coefficient of pairs of assets.

Investors can diversify on their own by investing in select investments or can hold diversified funds that diversify on their own.

Diversification Strategies

Asset Classes
Fund managers and investors often diversify their investments across asset classes and determine what percentages of the portfolio to
allocate to each. Each asset class has a different, unique set of risks and opportunities. Classes can include:
Stocks—shares or equity in a publicly-traded company
Bonds—government and corporate fixed-income debt instruments
Real estate—land, buildings, natural resources, agriculture, livestock, and water and mineral deposits
Exchange-traded funds (ETFs)—a marketable basket of securities that follow an index, commodity, or sector
Commodities—basic goods necessary for the production of other products or services
Cash and short-term cash-equivalents (CCE)—Treasury bills, certificate of deposit (CD), money market vehicles, and other short-
term, low-risk investments

Industries/Sectors
There's tremendous differences in the way different industries or sectors operate. As investors diversify across different industries, they
become less likely to be impacted by sector-specific risk.
Corporate Lifecycle Stages (Growth vs. Value)
Public equities tend to be broken into two categories:growth stocks or value stocks. Growth stocks are stocks in companies that are
expected to experience profit or revenue growth greater than the industry average. Value stocks are stocks in companies that appear to
be trading at a discount based on the current fundamentals of a company.

Market Capitalizations (Large vs. Small)

Investors may want to consider investing across different securities based on the underlying market capitalization of the asset or
company.

Risk Profiles
Across almost every asset class, investors can choose the underlying risk profile of the security. For example, consider fixed-income
securities. An investor can choose to buy bonds from the top-rated governments in the world or to buy bonds from nearly defunct private
companies that are raising emergency funds. There are considerable differences between several 10-year bonds based on the issuer,
their credit rating, their future operational outlook, and their existing level of debt.

Risk appetite is the “amount and type of risk that an organization is willing to pursue or retain.”

Risk appetite can vary based on a number of factors, such as:

1) industry,
2) company culture,
3) competitors,
4) the nature of the objectives pursued(e.g. how aggressive they are), and
5) the financial strength and capabilities of the organization(i.e. the more resources a company has, the more willing it may be to
accept risks and the costs associated to them)

Risk tolerance is “an organization’s or stakeholder’s readiness to bear the risk after risk treatment in order to achieve its
objectives.”

risk tolerance “reflects the acceptable variation in outcomes related to specific performance measures linked to objectives the entity
seeks to achieve”, while risk appetite is defined as “a broad-based description of the desired level of risk that an entity will take in pursuit
of its mission”.

Different Risk Appetite:

1. Risk aversion is the tendency to avoid risk and have a low risk tolerance. Risk-averse investors prioritize the safety of principal over
the possibility of a higher return on their money. They prefer liquid investments. That is, their money can be accessed when needed,
regardless of market conditions at the moment. Risk-averse investors generally favor municipal and corporate bonds, CDs, and savings
accounts.
2. Cautious investors, high returns are less important than preserving their capital. This means they tend to prefer more stable, lower
risk investments, especially those which offer more liquidity, so the investors have the opportunity to sell quickly if there is a downturn.
Funds designed for cautious investors tend to have a lower equity exposure than those with a more adventurous style.

3. A balanced investor is one that seeks a balance between capital preservation and growth. It is used by investors with moderate risk
tolerance and generally consists of a fairly equal mixture of stocks and bonds. Balanced investment strategies sit at the middle of the risk-
reward spectrum. More conservative investors can opt for capital preservation strategies, whereas more aggressive investors can opt for
growth strategies.
4. Adventurous investor seek maximum return possible and are prepared to stomach heav volatility in the market to earn it.

Link: https://www.financial-expert.co.uk/investing-risk-appetite-questionnaire-tolerance/

Investing OR Trading
Long-term approach to the Short-term
market strategies to
maximizes returns

-ride out short term losses in a -get transactions to

fluctuating market profit quickly in a
fluctuating market

Financial Intermediaries
Financial Intermediaries hire highly qualified people to assess risky investments. These know how to DIVERSIFY (money/funds to
different investments instead of only to a single investment). These have cost advantage or economies of scale (especially in the case of
mutual funds). These help reconcile conflicting interests of users and providers of funds. These give providers of fund (particularly savers)
liquidity (as in the case of commercial banks on deposits)

*Financial intermediation is a process of indirect financing using financial intermediaries as the main route to transfer funds from
lenders to borowers.

10 Benefit of Financial Intermediaries:

1. Acceleration of funds flow between entities
2. Efficient allocation of funds
3. Creation of money
4. Support in price discovery
5. Improved liquidity for lenders
6. Reduced price risk for lenders
7. Diversification- economic function exercised by financial intermediaries which converts more risky assets to less risky assets through
sharing of risks.
8. Economies of scale- transaction cost is reduced as the number of transactions increases
9. Risk Mitigation- offer protection against adverse incidents
10. Implementation of monetary policy function-

THREE (3) CLASSIFICATION OF FINANCIAL INTERMEDIARIES

1. Depository Institutions – rely on deposits (biggest portion of liabilities) while loans are the biggest portion of assets
A. Commercial banks
A. Private Banking Institutions--Security Bank, Metrobank, RCBC, BPI, BDO, Chinabank,PNB
B. Government Banks--Landbank
B. Thrift banks-- BPI Family Savings, PS Bank, RCBC Savings Bank (Small savings, lower interest, longer period)
C. Rural banks-- BDO Network Bank, East West Rural Bank
 *E-wallets-provides accessible means to pay bills, do bank transfers, and other financial services safely anytime, anywhere. It
has partnered with several local government units to assist them in efficiently providing benefits and financial aid to the citizens, which
was vital during the pandemic

Capital Savings Corporation is a financial institution in the Province of Quezon that extend credit
to the marginalized sector of the province. They offer a program that lends at least Php50,000 to
demanders of fund payable in 10 years. The program is more competitive with other banks that
offer only a tenor of 5 years. Capital Savings Corporation is categorized as a
a. Commercial bank c. Savings Bank
b. Thrift Bank d. Universal Bank

Four types of Deposit Products:

1. Demand Deposits - withdrawable anytime without interest
2. Savings Deposits- withdrawable anytime and interest earning
3. Money Market Demand Deposits- 3 months or less term-period
4. Time Deposits- floating interest rates

2. Contractual Savings Institutions -do not rely on deposits for raising funds unlike banks, they acquire funds on a contractual basis
from different sources

-Insurance companies- collect premiums in exchange for selling protection against potention future risks.
-pension funds- collect contributions from employees

Defined contribution plan-depend solely on the performance of the investment

Defined benefit plan- fixed retirement benefit

1. Private Non Bank Financial Institutions

Investment houses
Financing companies
Securities dealers
Investment companies
Fund Managers
Lending investors
Pawnshops (Cebuana)
Private insurance companies (Manulife, Sunlife)
Venture capital corporations
Mutual building and loan associations
Non stock savings and loan associations

2. Government Non-bank Financial institutions

GSIS
SSS
HDMF
Edwards has Php2,500,000 from his savings. He approached C&T Inc. where he placed his money which C&T reinvested to create a
portfolio for Edwards. C&T Inc. charges Edwards with monthly fee for the services he received from them. C&T Inc is a financial
intermediary in the form of _________
a. Asset Management Firm c. Commercial bank
b. Investment Bank d. Universal bank

3. Investment Intermediaries

A. Asset Management
-Companies that manage funds owned by individuals, companies or government through buying & selling of financial
instruments
-Asset management Helps clients reach their investment goals, Manages money on behalf of clients, Provides investment advice
and recommendations, Focuses on buying securities, and Suits people who want stability and work-life balance.

1. Regulated investment companies (RIC)- manage investment portfolio

Two portfolios:
1. Passive funds (indexed funds)- managed to mimic market index movements such as the PSE Index (mirror)
2. Active funds -managed to outperform the index fund via actively trading securities in the fund portfolio

A Regulated Investment Company (RIC) is a mutual fund, real estate investment trust (REIT), or unit investment trust that
passes taxes on to investors.

Net Asset Value per share = Market Value of the portfolio – Liability
number of shares

Two types of RIC:

1. open-end funds/ mutual funds- do not have fixed number of shares

-allows investors to buy or sell shares at any time directly from the fund at their net asset value (NAV)
 -open-ended funds offer greater liquidity and flexibility compared to closed-ended funds

2. closed-end funds - fixed number of shares; Traded in secondary market

- investors can only buy or sell shares from other investors on the market, not directly from the fund itself

Cost associated with investing in RICs:

1. Shareholder fee/ Sales charge- one time
2. Annual fund operating expense/expense ratio-management fee

A mutual fund (MF) is a company that pools money from many investors and invests the money in securities such as stocks,
bonds, and short-term debt. The combined holdings of the mutual fund are known as its portfolio. Investors buy
shares in mutual funds. Each share represents an investor’s part ownership in the fund and the income it
generates.

Real estate investment trusts (REITs) are companies that own, operate, or finance income-producing real estate across a wide
range of property sectors. These investments allow you to earn income from real estate without having to buy,
manage, or finance properties themselves.

A unit investment trust (UIT) is an investment company that offers a fixed portfolio of stocks and bonds as
redeemable units to investors for a specific period. It is designed to provide capital appreciation
and/or dividend income. UITs, along with mutual funds and closed-end funds, are defined as
investment companies.

Exchange Traded Funds (ETF)- possess both open-ended (it is a mutual fund)
& closed ended funds (traded in secondary market) characteristics, but with small
premiums/discounts

• An exchange-traded fund (ETF) is a basket of securities that trades on an exchange just like a stock.
• ETF share prices fluctuate throughout the trading day; this is different from mutual funds, which only trade once a day after the
market closes.
• ETFs offer low expense ratios and fewer brokerage commissions than buying stocks individually.
• Usually offered by Banks

Hedge Funds- Absolute return (consistent/realized return) vs

Relative return (difference between benchmark and realized return)

A hedge fund, an alternative investment vehicle, is a partnership where investors (accredited investors or institutional investors)
pool money together, and a fund manager deploys the money in a variety of assets using sophisticated
investment techniques. Hedge funds, as opposed to other funds, can use leverage, take short positions, and
hold long/short positions in derivatives. They are less strictly regulated by the Securities and Exchange
Commission (SEC) as opposed to other funds.

• Spot Rate- Represents the current market interest rate for immediate borrowing or lending.
• Forward Rate- The agreed-upon interest rate for a future transaction, calculated based on the spot rate and expectations of
future market conditions.
 • Swap- A financial contract where two parties agree to exchange cash flows based on different interest rates, allowing
one party to potentially benefit from a lower interest rate while the other hedges against potential rate increases.

A group of investors pooled their money and acquired several derivatives combined with equity securities to gain
leverage with the price and market volatility. The amount they pooled is called Hedge Funds.

Cost associated with investing in Hedge Funds:

1. Fixed fee- based on asset value managed +
2. Incentive fee- certain % share in positive realized return performance-based compensation

A commercial bank is selling foreign currency denominated instrument at Php37 per unit today. They also expect that the
rate will improve after 30 days to be Php45 per unit. A fund supplier decided to acquire today at Php37 per unit. The amount is called
a. Spot Rate c. Swap Rate
b. Forward Rate d. Interest Rate

2. Separately managed accounts- based on specific necessities of a sole investor

Fees are higher
A separately managed account (SMA) is a portfolio of investments managed by an investment firm. SMAs are a
type of investment account that offer more customization than mutual funds

B. Investment Banks

 To originate securities issues negotiation between the officer of the issuing firm and officers of the investment bank
 to underwrite the issues by guaranteeing their sale in the primary capital markets
 to manage the distribution of these securities to the ultimate investors, members of the underwriting syndicate will form a selling
group
 to advice their corporate clients on long term financial matters

Top Investment Bankers in the Philippines

 ABCapitalOnline.com, Inc,
 Asian Alliance Investment Corporation
 Asian Focus Group Inc.
 BPI Capital Corporation
 Eastgate Capital Partners, Inc.
 First Abacus Financial Holdings Corporation
 First Metro Investment Corporation
 FSG Capital Inc
 Insular Investment & Trust Corporation
 Investment & Capital Corporation of the Philippines
 Mabuhay Capital Corporation, Inc.
 Medco Holdings, Incorporated
 Navarro Amper & Co.
 PNB Capital and Investment Corporation
 Punongbayan & Araullo
  SB Capital Investment Corporation
 Unioil Resources & Holdings Company, Inc.

Activities of Investment banks:

1. Public offering of securities
2. Private placement of securities
3. Trading of securities
4. Advisory services for merges, consolidations & financial Restructuring
5. Merchant Banking
6. Securities finance and prime brokerage services
7. Asset management
8. Research

Asset management focuses on helping clients reach their investment goals,

while investment banking focuses on creating capital for clients.

Both are important parts of the financial services industry.

ACTIVITY
1. DIFFERENTIATE COMMMERCIAL, THRIFT AND RURAL BANKS
2. DIFFERENTIATE REGULATED INVESTMENT AND SEPARATELY MANAGED ACCOUNTS IN TERMS OF
• STRUCTURE/OWNERSHIP
• REGULATORY ENVIRONMENT
• CUSTOMIZATION/ TRANSPARENCY
• ACCESSIBILITY
• MANAGEMENT FEES
• EXAMPLE

3. DIFFERENTIATE MUTUAL FUND, REAL ESTATE INVESTMENT TRUST, UNIT INVESTMENT FUND, EXCHANGE TRADED FUND
AND HEDGE FUND IN TERMS OF
• LIQUIDITY
• MINIMUM INVESTMENT
• TRANSPARENCY
• TAX EFFICIENCY
 FINANCIAL REGULATION

Read:
Republic Act 10607 or the Amended Insurance Code
Republic Act 7653 or the Bangko Sentral ng Pilipinas Charter

Assignment:
1. Illustrate the charters of the Financial Regulators in the Philippines.
2. Tabulate the drivers that affect the financial market and identify the risks that may arise.
3. Who are the key participants in the transactions of financial institutions? Who are net suppliers and who are net demanders?
4. What role do financial markets play in our economy? What are primary and secondary markets? What relationship exists between
financial institutions and financial markets?
5. What is the money market? How does it work?
6. What is the Eurocurrency market? What is the London Interbank Offered Rate (LIBOR) and how is it used in this market?
7. What is the capital market? What are the primary securities traded in it?
8. What role do securities exchanges play in the capital market? How does the over-the-counter exchange operate? How does it differ
from the organized securities exchanges?
9. Briefly describe the international capital markets, particularly the Eurobond market and the international equity market.
10. What are efficient markets? What determines the price of an individual security in such a market?

Multiple Choices
1. Which government agency is involved in monetary policy?
a. Department of Finance
b. Department of Budget and Management
c. Securities and Exchange Commission
d. Bangko Sentral ng Pilipinas

2. An Agency that provides trading infrastructure for the fixed-income market?

a. Philippine Dealing and Exchange Corp.
b. Securities and Exchange Commission
c. Philippine Stock Exchange Edge
d. Securities Clearing Corporation of the Philippines

3. All of the following are true about insurance companies, except

a. They invest their reserves
b. They may guarantee to reimburse lenders should lenders’ loans go into default
c. They participate in equipment leasing
d. They may only invest their reserves in interest-paying bank accounts under the govermnent law

4. The most important service provided by mutual funds to mutual fund investors is:
a. the opportunity to buy corporate securities at a discounted price
b. high expenses and trading costs which increase the rate of return for investors
c. diversification
d. a higher than average rate of return

5. Money is most correctly defined as anything that

a. is generally accepted as payment of goods and services and for discharging debts
b. has general value in exchange
c. is designed by the government as a means of discharging obligation
d. is accepted by the governent as a means of paying taxes

6. The function of money that expresses prices and contracts for deferred payments in terms of the monetary unit is referred to as
a. store of purchasing power
b. standard of value
c. medium of exchange
d. credit money

7. All insurance companies are supervised by

a. Insurance Commission
b. Bureau of Internal Revenue
c. Securities and Exchange Commission
d. All of the above

8. The following are the similarities of Social Security System and Goverment Service Insurance System, except
a. Pension fund administration
b. Supervised by the Department of Finance
c. Government Financial Institution
d. Insurance Fund

9. The following are guaranteed deposits of PDIC, except

a. Savings Account
b. Commercial Paper
c. Current Account
d. Combo Account

10. The three function of money are:

a. medium of exchange, store of value, and measure of liquidity
b. conduit of international trade, store of value, and standard of value
c. medium of exchange, store of value, and unit of account
d. inflation hedge, a measure of liquidity, and medium of exchange

11. Money decreed to be “legal tender” for the payment of debts is money backed by:
a. precious metals
b. commodities
c. government creditwortiness
d. gold or silver

12. The following are factors affecting fiscal policy, except

a. Economic Recession
b. Budget Surplus
c. Progressive Tax
d. Interest rate

13. This fiscal policy refers to increases in government spending or decreases in taxes or both so that the net effect on aggregate
demand is an increase in net government spending.
a. Expansionary
b. Contractionary
c. Discretionary
d. Non-discretionary

14. A group of several investment banking firms that participate in underwriting and distributing a security issue,
a. Syndicate
b. Bank
c. Bangko Sentral ng Pilipinas
d. Securities and Exchange Commission

15. Who is the financial regulator in the Philippines?

a. Department of Finance
b. Department of Budget and Management
c. Securities and Exchange Commission
d. Bangko Sentral ng Pilipinas