What kind of investor are you Stephanie Condra

We start our first session with Stephanie. Stephanie has an MBA and holds both a CFA and a
CAIA title. At AXA Investment Managers, she is a senior advisor to the institutional client group.

So let's start right away with our first topic. What kind of investor are you?

Have you ever wondered why one investor has a completely different asset allocation from
another? It might be the case that these investors have different views on what will happen in
the market, or it might be that you are comparing different types of investors. Knowing what
kind of investor you are is an important first step in constructing your investment strategy. We
can classify investors based on the characteristics they have in common. In this video we will
introduce and compare some of the most common investor types. When classifying your
investor type, the question to answer is, "who are you investing for?". If you are investing for
yourself or on behalf of a single person or entity, then you are an individual investor. On the
other hand, if you are a financial intermediary, that is investing on behalf of a group of other
investors, then you are an institutional investor. If you have been appointed to invest on behalf
of one of these investors, maybe you are working as an advisor or for mutual fund, you have a
fiduciary duty to act on their behalf when making investment decisions. This is another reason
why it is important to have a good understanding of the different types of investors. In general,
institutional investors are relatively large investors, their account values can be in the millions
or billions. Institutional investors are often considered to be more sophisticated investors, and
their investment decisions are made by teams of investment professionals.

Individual investors may feel knowledgeable enough to make investment decisions on their
own, or may appoint an advisor for support. These two investor categories, institutional and
individual, can be defined further. However, before we do that, let's take a look at some of the
characteristics that we will use to compare them. There are 4 key characteristics that
differentiate one investor from another. First is investment objectives. An investor's goals will
determine their return objectives and risk tolerance. This topic is covered in greater detail in
the next video, so we won't spend too much time on it now. Second is assets and liabilities.
Both sides of the balance sheet need to be considered: the focus is not just what on the
investor owns but also on what they might owe in the future. Time horizon is the third
characteristic. Long term is often considered to be greater than 15 years and short term less
than 3. Time horizon is also linked to liquidity requirements. The final differentiating
characteristics is legal and regulatory frameworks. This can include an investor's tax
circumstances. These frameworks are often in place to encourage or discourage certain
investment behaviour, for example trying to limit the risk that certain types of investors can
take. These 4 characteristics can help us to further define different types of individual and
institutional investors.

As mentioned, individual investors make decisions about their own money. Individual investors
can sometimes be referred to as retail investors. The term which reflects their tendency to
invest in package solutions like mutual funds. These investors might also be categorized based
on the value of their assets. For example, wealthy individual investors with over one million in
investable assets are often referred to as high net worth investors. As I mentioned before,
What kind of investor are you Stephanie Condra

individual investors might appoint an advisor or discretionary portfolio manager to make

investment decisions on their behalf. The investment objectives for an individual investor will
depend on their personal circumstances. In general though, most individual investors are either
looking to grow their assets over time to generate income to meet their spending needs, or to
protect their savings against inflation. Investment decisions will be based on achieving these
outcomes. Individual investors do not always have a well defined set of liabilities, but these can
still be estimated if the individual has a specific purchase in mind, or if there is an objective to
generate a future income. An individual may have a long-term horizon, for example if they are
investing for retirement, or a short-term horizon, if they have earmarked their investment for
an upcoming purchase.

There are various types of institutional investors, including pension plans, foundations,
sovereign wealth funds, insurance companies and banks. These investors typically have a well
defined purpose behind their investing, for example foundations generate income for
charitable purposes. Let's focus on pension plans; the objective of a pension plan is to provide
income to members in retirement; the goal of a pension plan is to have enough assets to cover
these future income payments. There are 2 types of pension plans: defined benefit and defined
contribution plans. A defined contribution plan's assets and liabilities are based on the level of
contributions paid into the plan on behalf of an individual member. Plus any investment
growth. At retirement, the member can withdraw income from their accumulated assets to
fund their retirement. In contrast, a defined benefit plan has committed to pay a regular
income to members through retirement. It is important for pension plans to understand and
measure these expected future cash flows, when setting their investment strategy and
assessing feature liquidity requirements. The investment time horizon for a pension plan tends
to be very long, covering members through retirement. Pension plans are usually exempt from
tax, though the income paid to individual members is usually taxable.

An insurance company's primary investment objective is to fund future policyholder benefits

and claims. Since most are publicly traded companies, they also look to generate additional
return for shareholders. Like defined benefit plans, insurers have contractual liabilities and
make investment decisions with these future payments in mind. In order to mitigate the risk
that these can't be paid, most regulators require that insurance companies maintain extra
assets, sometimes referred to as reserves, as a buffer against significant losses; the size of the
reserve is typically based on how much risk is being taken by the assets and liabilities. Which
means that the potential need to hold additional capital becomes a key consideration when
investment decisions are made. Life insurance companies are considered the classic long term
investor, sometimes covering the full life of a policyholder. Cash inflows from policy payments
usually exceed outflows, so liquidity requirements are minimal. As you can see, there are many
differentiating factors between investors, which lead them to adopt different portfolio
allocations.

Let's finish this video with a question: What is the main difference between defined benefit and
defined contribution plans?:
What kind of investor are you Stephanie Condra

a) the investment horizon, short term for defined benefit, long term for defined contribution, or

b) defined benefit plans have to match liabilities at the time of retirement

c) the eligible assets they can invest in, or

d) defined benefit relates to retail investors, while defined contribution relates to institutional
investors.

And the correct answer is b. As defined benefit plans have precise income to pay their members
during their retirement years, whereas defined contribution plans will invest and grow the
assets of the members up until their retirement age. Having established what type of investor
you are, the next step is to understand your investment objectives, the topic that's covered in
the next video.