Post on 28-Dec-2015
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CHAPTER 7 LECTURE.CHAPTER 7 LECTURE.
BACKGROUND . . .
WHY DO PEOPLE WHY DO PEOPLE INVEST?...INVEST?...
Individuals:– THE 25-YR-OLD "YUPPY" ? . . .– THE 25-YR-OLD "DINC" COUPLE ? . . .– THE 35-YR-OLD "YOUNG FAMILY" ? . . .– THE 45-YR-OLD "MID-LIFE CRISIS" ? . . .– THE 65-YR-OLD "RETIREE" ? . . .
DIFFERENT LIFE STYLES, LIFE CYCLES, PERSONAL GOALS, LEVELS OF WEALTH
WHY DO PEOPLE WHY DO PEOPLE INVEST?...INVEST?...
Institutions:– LIFE INSURANCE COMPANIES– PENSION FUNDS– MUTUAL FUNDS– BANKS– FOUNDATIONS
DIFFERENT CONSTITUENCIES, EXPERTISE, LIABILITIES, REGULATIONS, SIZES
WHY DO PEOPLE WHY DO PEOPLE INVEST?...INVEST?...
===> DIFFERENT TIME HORIZONS, RISK TOLERANCES, NEEDS FOR INCOME vs GROWTH
Therefore, . . . (implications for financial services industry)
TWO MAJOR INVESTMENT TWO MAJOR INVESTMENT OBJECTIVESOBJECTIVES::
1) GROWTH (SAVINGS) - RELATIVELY LONG-TERM HORIZON (NO IMMEDIATE NEED);
2) INCOME (CURRENT CASH FLOW) -- SHORT-TERM & ON-GOING NEED FOR CASH.
MAJOR CONSTRAINTS & MAJOR CONSTRAINTS & CONCERNS:CONCERNS:
- RISK- LIQUIDITY- TIME HORIZON- MANAGEMENT BURDEN, EXPERTISE- AMOUNT OF FUNDS AVAILABLE FOR
INVESTMENT (SIZE)- CAPITAL CONSTRAINT
Therefore (again), . . . What?
Exhibit 7-1: UNDERLYING ASSETS vs INVESTMENT Exhibit 7-1: UNDERLYING ASSETS vs INVESTMENT PRODUCTS, an Example from traditional corporate PRODUCTS, an Example from traditional corporate
finance:finance:Underl. Asset:
Invest. Products:
Invest. Product:
Invest. Products:
ABC Widgets Corporation(Collection of Physical, Human, & Legal Assets & Relationships)
ABC Common Stock(Subordinated claims)
- Moderate Risk- Moderate Total Return
- Low Cur.Yield
ABC Corporate Bonds(Senior claims)
- Low Risk- Low Total Return
- High Cur.Yield
Call Optionson ABC Stock
(Contingent claims)- High Risk
- High Total Return- Zero Cur.Yield
Various Mutual Funds(owning various different types of claims on ABC & other assets)
- Various Risk, Return, & Cur.Yield Configurations
Exhibit 7-2: AExhibit 7-2: A REAL ESTATE EXAMPLE of the REAL ESTATE EXAMPLE of the Investment SystemInvestment System
Underl. Asset:(Priv.Traded)
PrivateInvest. Products:
PublicInvest. Products:
CMBSpublicly traded
securities basedon a pool of mortgs
Investors:individual,institutional
"Bricks & Mortar" (e.g., Grump Family Shopping Centers)(Rent-producing Real Properties )
e.g., Ltd Partnerships(or CREFs, Priv.REITs, etc)
Own equtiy in properties:LP Shares (units) privately held
& privately traded if at all
Commercial MortgagesSenior (debt) claims:
Privately held & traded("whole loans")
REITs“UPREIT” Owns
LP Units,Issues publiclytraded shares.
(May also directly own Underl.Asset, or Mortgs
& CMBS)
Small
&LargeInvestors
Large Investors
(Wealthy Individuals, Developers, Institutions)
Small&
LargeInvestors
Exhibit 7-3:End of Year Public vs Private Asset Mkt Commercial R.E. Values:
(Indexes set to have Equal Avg Values 1974-98)
1.0
1.2
1.4
1.6
1.8
2.0
2.2
74 76 78 80 82 84 86 88 90 92 94 96 98 2000
NAREIT (Unlevered) NCREIF (Unsmoothed)
Exhibit 7-4: Approximate Aggregate Value of Asset Classes, USA late 1990s ($Trillion)
2
11
12
8
Cash
Stocks
Bonds
Real Estate*
Exhibit 7-6: HISTORICAL Exhibit 7-6: HISTORICAL PERFORMANCE OF MAJOR INVESTMENT ASSET PERFORMANCE OF MAJOR INVESTMENT ASSET
CLASSES, COMPARED TO INFLATION (CPI), CLASSES, COMPARED TO INFLATION (CPI), 1970-98:1970-98:
Value of $1 with Reinvestment
$0
$5
$10
$15
$20
$25
$30
$35
$40
$45
69 70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98
CPI TBill SP500 LGBond RE
Stocks $39.14Real Est 14.91LT Bond 14.32TBills 6.67CPI 4.34
Exhibit 7-7a: Value of $1 with Reinvestment:1969-83
0
1
2
3
4
5
69 70 71 72 73 74 75 76 77 78 79 80 81 82 83
CPI TBill SP500 LGBond RE
Real Est 4.75Stocks 3.31TBills 2.83CPI 2.69Bonds 2.36
Exhibit 7-7b: Value of $1 with Reinvestment, 1983-98
$0
$2
$4
$6
$8
$10
$12
$14
83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98
CPI TBill SP500 LGBond RE
Stocks $11.83Bonds 6.05Real Est 2.97Tbills 2.36CPI 1.62
Exh.7-9a: Avg.Ann.Total Return (70-98)
0%
2%
4%
6%
8%
10%
12%
14%
16%
T Bills G Bonds Real Estate Stocks
Income Growth
Exh.7-9b: Annual Volatility (70-98)
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
T Bills G Bonds Real Estate Stocks
EXHIBIT 7-10: THE "ROLLER COASTER RIDE" IN EXHIBIT 7-10: THE "ROLLER COASTER RIDE" IN COMMERCIAL PROPERTY PRICES OVER THE COMMERCIAL PROPERTY PRICES OVER THE
LAST QUARTER-CENTURY . . .LAST QUARTER-CENTURY . . .
69 71 73 75 77 79 81 83 85 87 89 91 93 95 97 99
0.0
0.2
0.4
0.6
0.8
1.0
1.2
1.4
1.6
1.8
2.0
Price Level Index U.S. Institutional Real Estate
REITs
REIT bust,Recession
ERISA: MPT=>P.F. demand
inflation fears
Boom, Tax incentivesS&L Dereg
Overbuilding Tax reform
Disinflation
Recession
S&L Crisis: FIRREA
Securitizatn: - REITs - CMBS