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Chapter 5
Chapter 5
Chapter 5
Chapter 5
Chapter 5
Chapter 5
Chapter 5
Chapter 5
Chapter 5
Chapter 5
Chapter 5
Chapter 5
Chapter 5
Chapter 5
Chapter 5
Chapter 5
Chapter 5
Chapter 5
Chapter 5
Chapter 5
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Chapter 5

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  • 1. 5 Chapter The Financial Services Industry: Mutual Funds
  • 2. Overview
    • In this segment ... Mutual Funds:
      • Activities of mutual funds
      • Size, structure and composition
      • Balance sheets and recent trends
      • Regulation of mutual funds
      • Global issues
      • Hedge funds*
  • 3. Mutual Funds
    • Open-ended
    • Closed-end
    • End of 2000:
      • More than 7,100 stock and bonds mutual companies.
      • Total assets of $5.12 trillion.
      • 8,200 firms and $6.97 trillion if money market mutual funds included
  • 4. Size, structure and composition
      • First mutual fund: Boston, 1924.
      • Slow growth, initially.
      • Advent of money market mutual funds, 1972.
        • Regulation Q.
      • Total assets in stock and bond mutual funds:
        • 1940: $0.4 billion.
        • 1990: $568.5 billion
        • 2000: $5,120.0 billion.
  • 5. Size, Structure and Composition
      • By asset size, mutual fund industry second most important FI group.
      • Recent inroads by commercial banks and insurance companies
        • Mellon purchase of Dreyfus
        • State Farm (9,000 agents)
  • 6. Types of Mutual Funds
    • Long-term funds (71.0% of assets, 2000)
      • Bond and income funds.
      • Equity funds.
      • Hybrid
    • Short-term funds (29.0% of assets, 2000)
      • Taxable and tax-exempt MMMFs
      • Generally higher returns than bank deposits but uninsured.
  • 7. Number of Mutual Funds
  • 8. Overview of Mutual Funds
      • Objectives (and adherence to stated objectives), rates of return and risk characteristics vary.
    • Examples:
      • Aggressive growth funds
      • Growth funds
      • Precious metals
      • World
  • 9. Returns to Mutual Funds
      • Income and dividends of underlying portfolio.
      • Capital gains on trades by mutual fund management.
      • Capital appreciation in values of assets held in the portfolio.
        • Marked-to-market.
        • Net-asset value (NAV).
  • 10. Web Resources
    • For information on the performance of mutual funds, visit:
    • Morningstar www.morningstar.com
    Web Surf
  • 11. Types of Funds
      • Open-ended funds: contrast with most corporate securities traded on stock exchanges.
      • Closed-end investment companies:
      • Fixed number of shares
        • Example: REITs.
        • May trade at premium or discount.
      • Load versus no-load funds.
  • 12. Mutual Fund Costs
    • Two types of fees:
      • Sales loads
        • Generally, negative effect on performance outweighs benefits
      • Fund operating expenses
        • Management fee
        • 12b-1 fees
  • 13. Mutual Fund Share Quotes
    • Quotes include:
      • Fund name, Objective, Minimum investment required, Asset size, Maximum initial and exit sales charges, Annual expenses, NAV, Dividends , Quarterly earnings,
      • One-through five-year rating (A through E).
  • 14. Balance Sheet and Trends
    • Money Market Funds
      • Key assets are short-term securities (consistent with deposit-like nature)
        • 2000: $1,303.9 billion (71.9% of total assets)
      • Many have share values fixed at $1 and adjust number of shares owned by the investor.
  • 15. Balance Sheet and Trends
    • Long-term Funds
      • Stocks comprise over 72.8 % of asset portfolios in 2000.
      • Shift to U.S. Treasuries, municipal bonds etc. when equity markets not performing as well.
  • 16. Regulation
      • One of the most closely regulated among non-depository FIs.
      • Primary regulator: SEC
        • Emphasis on full disclosure and anti-fraud measures to protect small investors.
        • NASD supervises mutual fund share distributions.
  • 17. Legislation
      • Securities Act 1933, 1934
      • Investment Advisers Act, 1940.
      • Insider Trading and Securities Fraud Enforcement Act of 1988.
      • Market Reform Act of 1990
        • Allows SEC to halt trading and introduce circuit breakers.
      • National Securities Markets Improvement Act of 1996.
        • Exempts mutual fund sellers from state securities regulatory oversight.
  • 18. Web Resources
    • For details of regulation of securities firms and investment banks, visit:
    • SEC: www.sec.gov
    • NASD: www.nasd.com
    Web Surf
  • 19. Global Issues
    • Worldwide growth in mutual fund investment not as great as in the U.S.
      • $1,626 trillion in 1992 to $4,833 trillion in 2000
        • 200% growth compared to 340% in U.S.
      • Larger returns in U.S.stock markets
      • Greatest development in countries with most developed markets
      • Opportunities from declining Japanese markets
  • 20. Hedge Funds*
    • Not technically mutual funds
      • Not subject to SEC regulation
      • Organized as limited partnership
      • Common feature is use of leverage
    • High returns in 1990s
    • Near collapse of Long-Term Capital Management
      • $3.6 million bailout

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