Organization and Management of Fund Management Company Activities

USD in the US at the time of initial issue. Brokers who underwrite the issue are also the ones who maintain the business of buying and selling those units. The price of the units depends on the price fluctuations of the securities in the fund's portfolio. Unit trusts issue only redeemable securities - namely units, each of which carries an undivided interest equal to the underlying securities it represents. That is the share that investors receive. Buyers of these investment units must pay an initial fee to the selling broker, typically 4%. Such high fees make short-term investors find this type of fund unprofitable. The fund's investment portfolio is generally maintained fixed over the life of the fund, so day-to-day management of the investment portfolio becomes unnecessary. Therefore, instead of having to manage it themselves, people only need to hire a supervisor and this is done by the trustees.

The main characteristics for funds to be considered a unit trust investment organization, separate from other investment fund companies, are determined as follows:

- UITs do not have a board of directors,

- UITs do not hire investment specialists, and

- UITs have static portfolios, not buying and selling securities in a dynamic manner.

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The investment portfolio of UIT investment funds often uses underlying securities such as corporate bonds, local bonds and government bonds [56].

c. Professional investment company (professional fund management company)

The most typical and popular type of investment company today is the professional fund management company. In a professional fund management company, investment work is professionally managed according to a portfolio of securities that are suitable for the objectives specified in the founding documents. Each day, usually at the end of the market trading session, the company must determine the value of its investment portfolio or the net asset value of each share NAV. Professional fund management companies are divided based on the structure of the investment funds that the company is managing.

The first type is a closed-end fund management company. Shares in a closed-end fund cannot be sold back to the company but will be bought and sold on the market.

closed-end funds typically build their capital structure through a one-time issuance of shares. The organization may issue common or preferred stock or bonds, just like a traditional manufacturing corporation.

The capital structure of a closed-end investment company is considered stable. Except for concentrated capital raising rounds, these companies do not issue shares or redeem shares. The issued shares are then bought and sold in secondary markets, either on an exchange or in the over-the-counter (OTC) market. The market price of these closed-end fund shares is determined by the forces of supply and demand, in the same way as other ordinary securities, rather than directly related to their net worth. Therefore, shares of a closed-end investment company are bought and sold at a premium or a discount to their net worth. In countries with developed stock markets, these companies are more commonly referred to as "over-the-counter funds".

The second type of fund that leaves the capital structure and shares open is called an open-end fund . This type of fund is characterized by the issuance of shares that can be redeemed by the company. The companies commonly called mutual funds, continuously issue new shares to increase capital, and are ready to redeem issued shares at the shareholders' discretion and at net value. The fund's shares are of only one type, common shares, which are basically purchased from investment companies, and can only be sold to the same place if they want to be resold.[45] Mutual funds can be organized as active or passive funds. The world's major mutual fund management companies include Fidelity, Putnam, Scudder, Alliance Capital, Morgan Stanley, Merrill Lynch and John Hancock.

Mutual funds have a number of advantages over other types of investment funds and it is these advantages that make mutual funds popular. These are:

 The investment amount does not need to be large,

 There is supervision by competent authorities over public funds,

 Reporting mechanism through net market value NAV and profitability index,

 Investors have many options for mutual funds, depending on their risk criteria and investment objectives,

 High liquidity of mutual fund certificates because investors can enter and exit at any time, creating flexibility and finance for investors.

Mutual funds own a portfolio of securities, and shareholders are in principle owners of those securities. Each investor owns an undivided share of the underlying bundle of securities. No individual has a vested interest in any particular asset that makes up the portfolio.

The capital structure of a mutual fund is open-ended, and the amount of investment capital raised from new shareholders is unlimited, so it is called an open-ended fund. The shares owned by the open-ended fund management company are called redeemable securities due to their nature. Also due to this nature, if there is a situation where many people want to liquidate their investments to get money, the capital of the mutual fund will be reduced.

Mutual funds of mutual fund management companies can be equity funds, hybrid funds, bond funds, money market funds. Different portfolios of mutual fund management companies have different levels of risk corresponding to the potential profit. The higher the risk, the higher the possibility of generating attractive profits and vice versa. Today, with a variety of investment funds, investors have many choices to suit their specific circumstances. Hybrid funds are funds that invest in a variety of financial products to achieve a balanced level of risk.

The next type of professional investment fund management company is whether it is a diversified or non-diversified investment fund management company . To be considered a diversified company, the investment portfolio must demonstrate a specific criterion. They can be diversified across industries or between different companies in similar industries, the diversification can also be across geographic regions or a mix of certain types of securities instruments. Diversification is a combined risk management technique, especially this is also an investment approach that makes mutual funds attractive to a wide range of investors [48].

However, not all investment companies meet the criteria to be officially recognized as diversified. According to the Investment Company Act of 1940 of the United States, an investment company is considered diversified when it meets the following 75-5-10 test: 75% of the total assets of the fund must be invested in securities issued by companies other than the investment company itself or companies with which it has a member relationship. Available cash in trading accounts and cash equivalents

Short-term government securities and short-term capital markets are counted as part of this 75% required investment. Do not use more than 5% of total assets to invest in securities of any joint stock company. Do not own shares of any joint stock company exceeding 10% of the value of that company [56]

As analyzed in the above sections, we see that open-end fund management companies are the most advantageous type because they meet most of the expectations of the general investing public. That is why mutual funds have developed very strongly in the US. These funds operate on a highly specialized and professional basis, the diversity of expertise that each fund represents, combined with the diverse characteristics, has helped create a fund industry that contributes greatly to US finance.

In addition, the classification of fund management companies can be based on the operating model, including: Fund Management LLC and Fund Management Joint Stock Company. Fund Management LLC is a company established in the form of a single or multiple member LLC. This model is not allowed to issue shares to raise capital. Fund Management Joint Stock Company is allowed to issue shares to raise capital.

1.1.3. Organization and management of fund management company activities

1.1.3.1. Organizational model of fund management company

Investment block

Research Block

Investment management block

Capital Management

Cost Management

Risk Management

Finance and accounting

Compliance, legal

Human resources, administration

Transaction processing

Information technology

Control

Business Department

Risk Management Department

Executive Department

The organizational model of fund management companies is similar to other financial institutions, divided into the business department (front office), risk management department (middle office) and operations department (back office).

Chart 1.2 : Organizational model of fund management company [17]

In terms of product lines, fund management companies can divide their operations into two main product lines: Fixed income products and Equity securities products.

The business department can be organized into business blocks such as: investment block, investment management block, research block... and can be organized according to the two main product lines above to facilitate customer service.

The risk management department updates the investment status for each product, currency, and type of risk for each investment staff and each trading group. This department can be organized into capital management, cost management, and risk management groups. The risk management group is divided into different risks such as credit risk, market risk, liquidity risk, and operational risk.

The operations department typically includes the finance department, legal department, compliance department, control department, information technology department, and control department.

The interaction between departments within a fund management company for an investment transaction is depicted in the diagram below:

Investment staff:

- Negotiation of transactions

- Establish terms and conditions of transaction

•Parts

support delivery

Translation: Consulting department, compliance department, legal department

Transaction processing :

- Confirm transaction details with customers

- Payment, custody

• Risk management:

• Update investment status

• Risk assessment and measurement

• Manage transaction limit violations

Accountant:

- Re-evaluate portfolio value

- Investment cost

- Profit and loss report for each department and each product

•Financial accountingmain:

• Financial reports

• Capital adequacy report

• Other compliance reports

Figure 1.3 : Interaction between departments for an investment transaction [17]

1.1.3.2. Principles of capital mobilization, management and allocation of fund management companies

One of the most important activities of a Fund Management Company is capital mobilization and investment capital management.

To raise capital for the funds it manages, the Fund Management Company may issue shares (for corporate funds) or issue bearer or registered fund certificates that may or may not be traded, depending on the type of fund.

Fund management companies can also raise capital from trust funds of individual or institutional clients, or from asset trading operations.

For the mobilized capital, the Fund Management Company is responsible for managing and allocating it in accordance with the provisions of law, fund charter and investment strategy applicable to each fund.

The Fund Management Company must ensure the independent and separate management of assets of each fund, and separate the capital and assets of the entrusted customers from the capital and assets of the company itself [2][4]. The business capital for the financial investment activities of the fund management company must come from the owner's equity, and it is strictly forbidden for the fund management company to use mobilized capital for financial investment.

Based on the mobilized capital, the Fund Management Company will build investment portfolios for the funds and allocate investment capital according to the investment strategy in these portfolios.

1.1.3.3. Mechanism for monitoring the operations of fund management companies

The State Securities Commission or National Securities Commission is the largest regulatory and supervisory agency for the operations of fund management companies. The Securities Commission decentralizes the regulatory and supervisory functions to a number of self-regulatory organizations such as the Securities Depository Center, the Stock Exchanges, and the Securities Research and Training Center. In addition, fund management companies are also subject to the supervision of the National Financial Supervisory Commission, the State Audit, the Ministry of Finance, and the State Bank (for fund management companies that are subsidiaries of commercial banks).

Self-regulatory organizations such as Stock Exchanges, Securities Depositories and Securities Scientific Research and Training Centers establish regulations and rules governing market operations and form securities business practices, ensuring fair treatment among investors.

members. The State Securities Commission is responsible for approving the rules and regulations of these self-regulatory organizations before promulgation and application. The Securities Commission is responsible for regularly inspecting and supervising the activities of fund management companies in terms of compliance with financial regulations, regulations on operational safety, general supervision of market operations, handling violations, and acting as an arbitrator to resolve disputes that arise.

In addition, the activities of the Fund Management Company also involve the participation of the following entities:

- The company itself ensures the management of investment funds and investments according to the investment portfolio stated in the fund's prospectus.

- Custodian bank: performs the preservation and custody of securities investment fund assets and supervises the fund management company to protect the interests of investors.

- Auditing company: conducts objective and accurate inspection and assessment of the investment fund's operations, ensuring transparency and the rights of relevant parties [3][4].

1.1.3.4. Investment strategy of the fund management company

To achieve the investment objectives, identifying, selecting and pursuing an investment strategy is extremely important for the Fund Management Company. Choosing the right investment strategy and applying it consistently is an important factor affecting the investment efficiency of the Fund Management Company, and it is also the basis for managers to monitor and adjust their investment portfolios.

There are many different investment strategies and investment schools, but popularly today, there are six basic portfolio selection strategies and they are divided into three opposing pairs: (1) Active and passive investment strategies, (2) Growth and value investment strategies, (3) Small- and large-scale stock investment strategies.

a. Active and passive investment strategies

Active Investing: With this strategy, investment managers exploit market inefficiencies by buying undervalued securities or short selling overvalued securities. Active portfolio managers can use

Quantitative tools such as P/E ratios, PEG ratios, and industry forecasts to try to predict long-term macroeconomic trends or to find companies whose stocks are temporarily out of favor or undervalued. Management companies with active funds also pursue other strategies such as merger arbitrage, short positions, options trading, etc.

The effectiveness of an active investment fund depends entirely on the capacity of the Fund Management Company or more precisely, the Company's investment experts and research team [42].

In fact, most active investment plans rarely outperform market benchmarks over the long term. However, many investors still find active investing an attractive investment strategy, especially in certain market segments where the market is underperforming, such as small-cap stocks.

Passive Investment: A passive investment strategy is one in which the fund manager tries to make as few investment decisions as possible to minimize transaction costs. This strategy mimics the portfolio of a well-known stock index, and investment funds of this type are called index funds.

Passive investment strategies are most commonly used in the stock market, in which stock index funds track major stock indexes such as Dow Jones and S&P 500. In addition, this strategy is also used for other types of investments such as bonds, commodities, etc.

In contrast to active investment strategies, passive investment strategies are based on the belief that the market operates efficiently, the equilibrium price in the market will comprehensively reflect the totality of market information, therefore, it is impossible to have better results than the market with active investment strategies, which are based on exploiting the inefficiencies of the market. Therefore, the more transaction costs are reduced, the more profitable the investor is.

b. Growth investment and value investment strategies

Investors pursuing an active investment strategy also pursue one of two other investment strategies: growth investing or value investing.

Investors following a growth investment strategy will choose