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3. Investors

3.1. Learning outcomes

After studying this text the learner should / should be able to:

1. Appreciate the ownership distribution of equities.

2. Analyse the motivation for holding equity.

3. Outline the statutory environment of investors.

4. Describe the various measures of return.

5. Describe the related concepts of return.

6. Describe the concept of risk.

7. Discuss the risk predisposition of investors.

8. Describe the measurement of risk.

9. Appreciate the relationship between risk and return.

3.2. Introduction

In this section we discuss the issues surrounding the investors in equities, including the concepts of risk and return in the equity market. The following are the main sections:

• Ownership distribution.

• Motivation for holding equity.

• Statutory environment of investors.

• Measures of return.

• Other concepts of return.

• Risks faced in holding financial assets.

• Risk predisposition or preference.

• Measurement of risk in the financial markets.

• Relationship between risk and return.

• Risk and return: the record.

3.3. Ownership distribution

Any discussion on the ownership distribution of equities should be done within the framework of the financial system; this is depicted in Figure

Equities are issued by companies (mainly local and to a small degree foreign) and held by:

• Certain financial intermediaries.

• Certain ultimate lenders.

Figure 1: equity issuers & investors

DEPOSIT INTERMEDIARIES

Central bank (CB)

0%

Private sector banks

<1%

NON-DEPOSIT INTERMEDIARIES (INVESTMENT VEHICLES)

Contractual intermediaries (CIs)

Insurers

40%

Retirement funds

40%

Collective investment schemes (CISs)

Securities unit trusts (SUTs)

10%

Property unit trusts (PUTs)

0%

Exchange traded funds (ETFs)

8%

Alternative investments (AIs)

Hedge funds (HFs)

2%

Private equity funds (PEFs)

<1%

Table 1: Estimated proportional investment in equities by the mainstream financial intermediaries

In most countries ownership distribution numbers of listed equities are not readily available for all the financial intermediaries. However, it is safe to assume that central banks are not holders at all and that the QFIs (probably only investment trusts / companies) and the private sector banks are relatively small holders of listed equities. This leaves the investment vehicles as the main holders (of the financial intermediaries), i.e. the contractual intermediaries, collective investment schemes and the alternative investments (hedge funds specifically).

It is safe to assume the numbers indicated in Table 1 is a fair reflection of the holdings of equities12. The insurers (long-term insurers mainly) and the retirement funds are the largest holders by a large margin. Next in line is the unit trust industry with about 10%, followed by the ETFs with about 8%. The hedge funds hold the balance of around 2%.

The split of the holding of equities between financial intermediaries and the ultimate lenders is not known, but an estimate of 30% / 70% respectively would not be unreasonable.

Of the ultimate lenders, it is safe to assume that the government sector is not a large holder of listed equities. It does hold equity in parastatals, some of which are listed. This leaves the foreign sector, the corporate sector and the household sector.

The foreign sector in many countries is a large holder of listed equities, but no clean data is available on their holdings. The corporate sector will also be a holder of listed equities as many listed companies have listed subsidiaries, but its holding will not be large.

The household sector is also large holder of equities. Many individuals have portfolios that are managed by themselves (of course because equities can be purchased in small denominations), by their stockbrokers and by fund managers. As in the case of the foreign and corporate sectors, numbers are not available in this regard.

 
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