Investment Basics - Aug 2008

Emirates Bank
Al Shaheen Club
Investments Training September 2008

Vinod J. Bhatia
1
Contents
• Part 1 – Basic Investment Principles
• Part 2 – Customer Profiling
• Part 3 – Investment Sales Process and

Documentation
www.emiratesbank.com Aug 2008 2

Part 1
Basic Investment Principles
3
Contents
• Basics of Investing
• Risk Vs. Return
• Asset Classes
• Asset Allocation
• Islamic Investments

Basics of Investing
5
Basics of Investing
• Savings vs. Investing

- Savings – short term to meet immediate requirements.
Defined tenor.
- Investing – longer term in nature. Goals are defined.
Liquidity need is lower.
• Why would a customer invest / investment Objectives?

- Time value of money – beat inflation
- Meeting goals – retirement, house, children’s education
- Preserve capital
- Higher return targets
- Tax savings

Objectives Vs. Constraints
• Objectives – they are the reasons for investment

- Could be apparent / stated – for example retirement,
housing.
- Could be hidden – Accumulation of wealth to gift to family
members.
- Could be unknown – Medical emergencies, job insecurity.
• Constraints - challenges faced by the client’s portfolio due to

controllable / uncontrollable conditions.
- For example heavy mortgage payment is a constraint to
liquidity; old age is a constraint on the ability to take risk or
invest in very long term assets

Risk vs. Return
8
Investment Risk vs. Investment Return
•Risk – It is defined as the uncertainty in getting

returns (or capital) on an investment.
•Returns – the reward for taking risk i.e, profits,

income, dividends
For example – A trader dealing in commodities takes risk on his

investment in his stock. The prices may fall. Alternatively if the price
rises, the profit (returns) he makes on the sale is his reward for
taking risk.

Asset Classes
10
Different Types of Asset Classes
• Cash / Cash Equivalent – mainly short term in nature, highly liquid. Example Call /
Fixed deposits, Money Market mutual funds, Call Money
• Bonds / Fixed Income – medium to long term in nature, less liquid than cash / cash
equivalent. Example corporate bonds, debentures, government securities, deep
discount bonds, bond funds, etc.
• Property – medium to long term in nature, very low liquidity, many a times
involves large investments. Developed / undeveloped; agricultural, commercial,
residential, REIT.
• Equity/Stocks – medium to long term in nature, fairly liquid but liquidity varies for
individual stocks, volatility in price is very high. Examples are individual stocks
and different category of mutual funds based on nature of investment &
diversification.

Different Types of Asset Classes
• Hedge Funds/Alternative Strategies – different from equity mutual funds, medium to

long term in nature, fairly liquid but liquidity varies for individual fund, volatility in
price is very high. The fund strives to deliver positive returns for all market
situations.
• Commodities – Example - metals (copper, aluminum), precious metals (gold,

silver), oil, etc. Gold is one of the most preferred commodities for investments.
Commodity mutual funds are available for investors.
Note : An Investor’s portfolio, a mutual fund product or a structured product can

consist of a single asset class or a mix of asset classes.

Asset Allocation
13
Asset Allocation
• Definition - the process by which the wealth / investible wealth of

an investor is distributed over various asset classes in order to
• Achieve consistent returns keeping in mind the objectives
and the constraints of the investor
• Diversify risk
• Allocation factors –
• ability to handle risks.
• how long the investor plans to hold your investments.
• how much money is to be invested?
• investor goals are very important.

Your Portfolio
For the More Adventurous
Stocks
Commodities
d
ar
Currencies
ew Speciality Funds
R
Technology ; HealthCare; Hedge
Thematic ; Bio tech ; Energy etc.
&
k
is
Global / Regional Funds

R
American; European; Asia; Asia-Pacific;

Japan; Far East; Global
Core Inv
Fixed Income Investments

Global Investment Strategies Growth Portfolios
V-Factor
Increase Risk Reduce Risk

Reduce Diversification Increase Diversification
As the Market Goes Down: As the Market Goes Up:

•Become More Aggressive •Become More Conservative
•Increase Portfolio Risk (beta) •Reduce Portfolio Risk (beta)
•Reduce Portfolio Diversification (R2) •Increase Portfolio Diversification (R2)
•Add to Positions in Favored Stocks •Reduce or Sell Fully Valued Stocks

Critical Q’s
Time Horizon
?
Goals Risk
? Tolerance
?

Critical Q’s To Ask Yourself
• Time horizon for the portfolio as a whole.
• Degree of volatility or value impairment the investor can

withstand; aggregate and for specific investment
categories.
• Desired extent of principal versus purchasing power

protection.
• Role and amount of core and non-core asset classes.

Critical Q’s To Ask Yourself
• Degree of patience and conviction that can be maintained

in the face of overall portfolio underperformance relative
to the performance of one or two asset classes; and, not
to be minimised.
• Investor’s confidence level in the specific return, risk, and

correlation projections on which asset allocation
decisions are based.

Rule of thumb is that the younger you are, the more
aggressive you can be with your investment decisions….
because, your investments will have a longer time to

possibly recover from the normal ups and downs of the
market or smoothen a bumpy ride over time

Asset Allocation & Risk Diversification
• Asset Allocation results in investments being spread across

various asset classes
• These asset classes have different correlation between

themselves – an asset class may or may not perform in the same
manner as another during a given period.
• For example over the last few years Gold has given high returns
whereas the same investment in bonds would have performed
less.
• Hence within a portfolio there would always be some

investments that would be performing better than the others

Asset Allocation & Risk Diversification
• This results in the portfolio performance remaining in a more

predictable / controllable range and hence risk diversification
Want a smoother ride….diversify, diversify,

diversify…..

Interest and Dividend Reinvestment
• This concept is one of the most important, yet least appreciated, aspects
of investing in specific asset classes.
• Attention must be paid to the necessity, the consequences, and the

challenges of investing coupon payments or dividends at sufficiently
high rates of return.

Spending Vs Reinvestment

Mutual Funds
• Definition - A mutual fund is an investment company that pools

money from share holders and invests in a portfolio of
securities.
• Payout -
Income Distribution : pay-out from the income earned from investments.
Example – dividends and interest
Capital-gain investment : pay-out from profits from the sale of the
investments.
• Types of Mutual Funds - Bond, Stock, Money market and Focused

Funds

Benefits of Mutual Funds
• Diversification - main reason for investing in mutual funds.

Mutual funds hold a wide variety of securities, reducing
exposure to the risks of individual securities.
• Choice – within the broad categories of stock, bond and money

market funds, investors are able to choose amongst a variety of
investment approaches depending on your risk appetite and
financial goals.
• Liquidity - mutual fund shares are liquid investments that can be

sold on any business day. Mutual funds are required by law to
buy, or redeem, shares each business day.

Benefits of Mutual Funds
• Professional Management
• Financial safety - mutual funds are highly regulated by the

regulatory institutions such as the U.S. Securities and Exchange
Commission (SEC) and U.K. Financial Services Authority (FSA)
• Fees – can be in the form of:

Annual management fee : charged annually on the outstanding
assets
Initial subscription fee : charged upfront as an entry fee
Other charges / fee : administration, redemption charges,
performance fee

Mutual Funds – Equity
Based on size of the companies

invested in
Based on geographical regions

&/or markets
Based on sectors / themes & specific

conditions

Based on size of the companies invested in
Large Cap. - investing only in large companies satisfying

a certain minimum size / market capitalization
criteria
Mid Cap. - Investing in mid size companies
Small Cap. - Investing in small companies, below a

certain specified size.

Based on Geographical Regions &/or Markets
US Equities
European Equities
Eastern Europe Equities
Latin America
Asia Pacific
Asia Pacific Ex-Japan
Emerging Markets
Asian Tigers
Turkey
Japan
Nordic

Based on Sectors/Themes &Specific Conditions
Healthcare Funds
Technology Funds
Telecom Funds
Blue-chip Funds
Islamic Fund
Ethical Funds
Consumer Goods Funds

Hedge Funds / Alternative Investments
• Some recent definitions of hedge funds (are these a myth?)
• Hedge funds are speculative funds managing investments for private

investors
• Hedge funds are speculative funds which make large bets on market
movements
• Investment vehicles that attempt to make above-average returns.
Often bet on currency markets or mergers and acquisitions.
• A fund which is allowed to use aggressive strategies that are
unavailable to mutual funds, including selling short, leverage,
programme trading, swaps, arbitrage and derivatives
• These are funds usually used by wealthy investors or institutions.
Hedge funds are restricted by law to no more than 100 investors; the
minimum contribution is typically USD 1 Million.
Source: Gulf News

Hedge Funds / Alternative Investments
• A more sensible definition
• A hedge fund is a fund that can take both long and short positions,
use arbitrage, buy and sell undervalue securities, trade options or
bonds, and invest in almost any opportunity in any market where it
foresees gains at reduced risk. The primary aim of most hedge
funds is to reduce volatility and risk while attempting to preserve
capital and deliver positive returns under all market conditions.
Source: Howard Smith, QIM Asset Managers; through Sean Kelleher and Gulf News

Hedge Funds/Alternative Strategies
• A fund where the primary objective is to achieve absolute positive

returns.
• Quantitative Strategies - Long / Short; Dividend Recapture;
Growth
• Arbitrage / Relative Value - Cash / Futures; Convertible
Arbitrage; Index Reconstitution
• Event Driven - Distressed Securities; Merger Arbitrage

Capital Guaranteed Investments /
Capital Protected Products
• These are structured products offering the investor capital

protection, with or without a guaranteed coupon and /or an
upside potential.
• Capital Protected (CP) products linked to e.g. hedge funds offer

investors the opportunity of obtaining exposure to alternative
assets whilst immediately taking away the risk of falling foul of
adverse market-timing and potential loss of the initial
investment
• Once the structure has been put in place, then the capital is
guaranteed and will not change irrespective of variations in
interest rates, volatility, rise of the asset value etc.

Capital Guaranteed Investments / Capital
Protected Products
• The investment is usually not liquid. That is to say that the

performance and guarantee terms are only relevant at maturity
of the investment, and the investment must be held for its full
term to realise the return structure. Penalty fees may be charged
for early / premature redemption
• Are capital guaranteed investments a good idea?

Yes
• Big name protection for boutique managers
• Wrappers for complex products
But
• No free lunch
• Costs - in & out
• Understanding - guarantee or protection?

Product Range
V Low Low Low/Med Medium Med/High High V High

Risk Risk Risk Risk Risk Risk Risk
Equity Linked
Protected Note D Islamic E B
Global Cert
FX Linked D Islamic E B
Protected Note USA Cert
Arab Income D Islamic E B Emirates

Commodity Linked
Fund Europe Cert Gateway Fund
Protected Note
Structured Emirates Real D Islamic E B
Deposit Dynamic Estate Fund Asia Pac Cert
Special Liquidity Fund
Deposit Range Conservative Balanced Active Arab Gateway
Cash Plus
Accruals Managed Managed Managed Fund
Portfolio
V Low Low Low/Med Medium Med/High High V High

Risk Risk Risk Risk Risk Risk Risk
Bank Pure
Bold italic product = Sharia compliant Equity
Account

Islamic Investments
38
Sharia guidelines for investment
• The Sharia is basically concerned with two major issues
Core business of the company
Finances of the company

1. Core business of the company
• An Islamic investor may not purchase the shares of

corporations whose primary or basic business is unlawful
(haram).
• Investments in companies dealing in pork, alcohol, liquor,

gambling, etc is not permissible. As is investing in companies in
the entertainment sector such as casinos and hotels which
generate much of their revenue from gambling and alcohol

2. Finances of the company
• Shariah scholars have set certain parameters to qualify a

company, which is involved in permissible financial
transactions, for investment by Muslims.
• Debt to Equity ratio
Refers to the debt or corporate borrowings of the company. These
borrowings are made from sources such as banks and capital
markets. The rule is that a debt to equity ratio of less than one third
is tolerable. This limit is only applicable to companies whose
primary businesses are acceptable.
• Interest earning
Islamic indexes have laid down the condition that a company’s non
operating interest income, as a percent of its revenue, must be less
than 5% for it to qualify as a permissible investment.
Investor in turn should donate this 5% interest earned by the
company towards charity.

2. Finances of the company
• Cash & Receivables

The Islamic Shariah distinguishes between sale of real goods and
that of money and debt. In the latter such sale can only be done at
par value. Anything more (or less) may be considered usurious
from the Shariah point of view.
Many Islamic Indexes and screens lay down the rule that ,a
company’s accounts receivables ,as a percent of its total assets
,must be less than 33%.

Part 2
Customer Profiling
Source: Euromoney Training
43
Customer Profiling
• The process by which an AM understands the customer’s –

• Investment goals
• Investment constraints
• Client Profiling is closely associated with
• Client life cycle
• Attitude towards risk
• Financial circumstances : total wealth, size current

investment

Investment Goals
• Returns
• Magnitude : how much?

• Form : current income or capital growth
• Liquidity : How much cash and when
• Tax Goals
• Others : Unique Goals / Preferences

Types of Goals
• Near Term
• Low Priority : vacation, luxury goods

• High Priority : mortgage payments, children’s
education
• Long Term
• Low Priority : Philanthropy, Gifts to Children

• High Priority : Retirement Funding

Investment Constraints
• Cash Flow availability for investments
• Risk Profile : aversion or tolerance
• Time Horizon : How long?
• Liquidity Needs : High or Low
• Tax situations
• Others : Unique constraints

Types of Constraints
• Heavy Current Needs
• Short Time Horizons
• High Liquidity Needs
• Unique Constraints : moral beliefs, fear of disclosure

Investor Lifecycle
• Accumulation Phase – young adulthood to middle age; growing

income; asset acquisition; small savings; low risk tolerance.
• Consolidation Phase – middle age to retirement; income

peaking; shift from short term to long term investing; net worth
increases; high risk tolerance.
• Spending Phase – retirement to death; declining income; asset

liquidation; regular income requirement; very low risk tolerance.
• Gifting Phase – retirement to death; providing financial

assistance to others (charities, gifts); estate planning

Investor Attitude Towards Risk
• Changes with lifecycle
• Income phase – low to medium risk tolerance
• Growth phase – high risk tolerance
• Retirement phase – low risk tolerance

Part 4
Investment Sales Process
And Documentation
51
Investment Sales - Process
• Step I - Account Manager contacts customer. Sets up

meeting for self with/without Investment Specialist. Client is
clearly informed that the meeting is being requested for offering
Emirates Bank investment products.
• Step II - AM meets up with the client. Initially, an

attempt is made to understand the client’s investment profile.
This also involves understanding the products, markets, asset
classes, that the customer is already invested into and the time
frame of these investments.
• Step III - AM to request customer for a detailed risk

profiling (Investor Financial Assessment – IFA). AM to put
his/her comments of risk profiling and have it signed by
customer.

Investment Sales - Process
• Step IV - Based on the results of the risk profiling, AM

to suggest products to the client.
• Step V - Client to choose whether or not to accept the

recommendations and accordingly tick on the IFA form. Client
may choose a execution only option.
• Step VI - Investor Account Agreement to be filled up

and signed by the client.
• Step VII - AM to collect other documents (signed Term

Sheet, PP copy, proof of residence) as per product
requirements.
• Step VIII - After the meeting, AM to complete his/her part

of the Investor Account Agreement / IFA Form and send the
entire set to AMU for further processing.

Investment Sales - Documentation
Risk Assessment.pdf

Investment Sales - Documentation
Investor Account Agreement.pdf

Process Document
56
Investment Sales Commission
• AM gets commission from the investment income generated

• Commission paid quarterly based on performance
• 3 slabs –
Investment Total Income Commission

Target Target
Slab 1 No At least 80% 10%
Slab 2 Yes At least 80% 20%
Slab 3 Yes Yes 35%
• 80% of the commission for the quarter paid at the end of the
quarter with the rest paid at the end of the year.
For full clarifications please contact BP&C

Thank You

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Emirates Bank

Investments Training September 2008

• Part 1 – Basic Investment Principles

• Part 2 – Customer Profiling

• Part 3 – Investment Sales Process and

www.emiratesbank.com Aug 2008 2

• Risk Vs. Return

www.emiratesbank.com Aug 2008 4

• Savings vs. Investing

• Why would a customer invest / investment Objectives?

www.emiratesbank.com Aug 2008 6

• Objectives – they are the reasons for investment

• Constraints - challenges faced by the client’s portfolio due to

www.emiratesbank.com Aug 2008 7

•Risk – It is defined as the uncertainty in getting

•Returns – the reward for taking risk i.e, profits,

For example – A trader dealing in commodities takes risk on his

www.emiratesbank.com Aug 2008 9

www.emiratesbank.com Aug 2008 11

• Hedge Funds/Alternative Strategies – different from equity mutual funds, medium to

• Commodities – Example - metals (copper, aluminum), precious metals (gold,

Note : An Investor’s portfolio, a mutual fund product or a structured product can

www.emiratesbank.com Aug 2008 12

• Definition - the process by which the wealth / investible wealth of

www.emiratesbank.com Aug 2008 14

For the More Adventurous

Global / Regional Funds

American; European; Asia; Asia-Pacific;

www.emiratesbank.com Aug 2008 15

Increase Risk Reduce Risk

As the Market Goes Down: As the Market Goes Up:

www.emiratesbank.com Aug 2008 16

www.emiratesbank.com Aug 2008 17

• Time horizon for the portfolio as a whole.

• Degree of volatility or value impairment the investor can

• Desired extent of principal versus purchasing power

• Role and amount of core and non-core asset classes.

www.emiratesbank.com Aug 2008 18

• Degree of patience and conviction that can be maintained

• Investor’s confidence level in the specific return, risk, and

www.emiratesbank.com Aug 2008 19

because, your investments will have a longer time to

www.emiratesbank.com Aug 2008 20

• Asset Allocation results in investments being spread across

• These asset classes have different correlation between

• Hence within a portfolio there would always be some

www.emiratesbank.com Aug 2008 21

• This results in the portfolio performance remaining in a more

Want a smoother ride….diversify, diversify,

www.emiratesbank.com Aug 2008 22

• Attention must be paid to the necessity, the consequences, and the

www.emiratesbank.com Aug 2008 23

www.emiratesbank.com Aug 2008 24

• Definition - A mutual fund is an investment company that pools

• Types of Mutual Funds - Bond, Stock, Money market and Focused

www.emiratesbank.com Aug 2008 25

• Diversification - main reason for investing in mutual funds.

• Choice – within the broad categories of stock, bond and money

• Liquidity - mutual fund shares are liquid investments that can be