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Class 3

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Transcript

  • 1.
    • Chapter Five:
    • Mutual Funds
    07/09/10 08:28
  • 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*
    07/09/10 08:28
  • 3. Mutual Funds
    • Open-ended
    • Closed-end
    • End of 2003:
      • More than 7,100 stock and bond mutual companies.
      • Total assets of $5.36 trillion.
      • 8,200 firms and $7.41 trillion if money market mutual funds included
    • Slower rate of growth in the industry in early 2000s than in 1990s
    07/09/10 08:28
  • 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: $1,065.2 billion
        • 2003: $7,414.1 billion.
    07/09/10 08:28
  • 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)
        • As of 2004, insurance companies managed approximately 14% of mutual fund assets
    07/09/10 08:28
  • 6. Types of Mutual Funds
    • Long-term funds
      • 74.3% of assets, 1999
      • 2002, long-term funds dropped to 62.1% of assets, losing ground to MMMFs
    • Types of Long-term Funds:
      • Bond and income funds.
      • Equity funds.
      • Hybrid.
    07/09/10 08:28
  • 7. Types of Mutual Funds
    • Short-term funds
      • 25.7% of assets, 1999.
      • 30.2% of assets, 2002.
      • Taxable and tax-exempt MMMFs
      • Generally higher returns than bank deposits but uninsured.
    • Impact of low interest rates during early 2000s
    07/09/10 08:28
  • 8. Number of Mutual Funds
  • 9. Overview of Mutual Funds
      • Objectives (and adherence to stated objectives), rates of return and risk characteristics vary.
    • Examples:
      • Capital appreciation funds
      • Growth funds
      • High-yield bond
      • World equity
      • Corporate bond
    07/09/10 08:28
  • 10. 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).
    07/09/10 08:28
  • 11. Web Resources
    • For information on the performance of mutual funds, visit:
    • Morningstar www.morningstar.com
    07/09/10 08:28
  • 12. 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.
    07/09/10 08:28
  • 13. Mutual Fund Costs
    • Two types of fees:
      • Sales loads
        • Generally, negative effect on performance outweighs benefits
      • Fund operating expenses
        • Management fee
        • 12b-1 fees
    07/09/10 08:28
  • 14. Mutual Fund Share Quotes
    • Quotes include:
      • Fund NAV, Fund name, Objective, one-month through ten-year return and rating (A through E), Maximum initial charges, and Annual expenses.
    07/09/10 08:28
  • 15. Balance Sheet and Trends
    • Money Market Funds
      • Key assets are short-term securities (consistent with deposit-like nature)
        • 2003: $1,395.9 billion (69.2% of total assets)
      • Many have share values fixed at $1 and adjust number of shares owned by the investor.
    07/09/10 08:28
  • 16. Balance Sheet and Trends
    • Long-term Funds
      • Stocks comprised over 65.6 % of asset portfolios in 2000.
      • Credit market instruments 32.3% of asset portfolios
      • Shift to U.S. Treasuries, municipal bonds etc. when equity markets not performing as well.
    07/09/10 08:28
  • 17. 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.
    07/09/10 08:28
  • 18. Regulatory Changes
    • Prosecutions in light of trading abuses in early 2000s.
      • Market timing
      • Late trading
      • Directed brokerage
      • Improper fee assessments
    • Changes include: SEC requirements for independent board members; reporting and disclosure requirements
    07/09/10 08:28
  • 19. 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.
    07/09/10 08:28
  • 20. Pertinent Websites
    • American Banker www.americanbanker.com
    • American Funds www.americanfunds.com
    • Federal Reserve www.federalreserve.gov
    • Fidelity Investments www.fidelity.com
    • Investment Company Institute www.ici.org
    • Morningstar, Inc. www.morningstar.com
    • SEC: www.sec.gov
    • NASD: www.nasd.com
    • Vanguard www.vanguard.com
    • Wall Street Journal www.wsj.com
    07/09/10 08:28
  • 21. Global Issues
    • Worldwide growth in mutual fund investment not as great as in the U.S.
      • $1.626 trillion in 1992 to $6.543 trillion in 2003
        • Over 300% growth compared to 350% in U.S.
      • Larger returns in U.S.stock markets
      • Greatest development in countries with most developed markets
      • Opportunities from declining Japanese markets
      • Efforts to reduce barriers for U.S. mutual fund sponsors
        • China and other Asian countries
    07/09/10 08:28
  • 22. Hedge Funds*
    • Not technically mutual funds
      • Not subject to SEC regulation
      • Organized as limited partnership
        • Small number of sophisticated investors
      • Common feature is use of leverage
    • High returns in 1990s
    07/09/10 08:28
  • 23. Hedge Funds*
    • Near collapse of Long-Term Capital Management
      • $3.6 billion bailout
      • 2003 SEC scrutiny of hedge funds
      • Scandals such as Canary Capital Partners involving trades with mutual funds
    07/09/10 08:28
  • 24.
    • Chapter Six:
      • Finance Companies
    07/09/10 08:28
  • 25. Overview
    • In this segment we discuss Finance Companies:
      • Activities of finance companies
      • Competitive environment
      • Size, structure and composition
      • Regulation
      • Global issues
    07/09/10 08:28
  • 26. Historical Perspective
    • Finance companies originated during the depression.
      • Installment credit
      • General Electric Capital Corporation.
      • Competition from banks increased during 1950s.
    • Expansion of product lines
      • GMACCM is largest commercial mortgage lender in U.S.
    • Industry is highly concentrated
      • Largest 20 firms account for more than 75% of assets.
    07/09/10 08:28
  • 27. Finance Companies
    • Activities similar to banks, but no depository function.
    • May specialize in installment loans (e.g. automobile loans) or may be diversified, providing consumer loans and financing to corporations, especially through factoring.
    • Commercial paper is key source of funds.
    • Captive Finance Companies: e.g. GMAC
    07/09/10 08:28
  • 28. Major Types of Finance Companies
    • Sales finance institutions
      • Ford Motor Credit and Sears Roebuck Acceptance Corp.
    • Personal credit institutions
      • Household International Corp. and AIG American General.
    • Business credit institutions
      • CIT Group and Fleet Boston Financial.
      • Equipment leasing and factoring.
    07/09/10 08:28
  • 29. Web Resources
    • For information on finance companies, visit:
    • www.ge.com
    • www.gmacfs.com
    • www.fordcredit.com
    • www.household.com
    • www.americangeneral.com
    • www.citgroup.com
    07/09/10 08:28
  • 30. Largest Finance Companies
  • 31. Balance Sheet and Trends
    • Business and consumer loans are the major assets
      • 51.9% of total assets, 2003.
      • Reduced from 95.1% in 1977.
    • Increases in real estate loans and other assets.
    • Growth in leasing (largely due to tax incentives of 1981 Economic Recovery Act).
    • Finance companies face credit risk, interest rate risk and liquidity risk.
    07/09/10 08:28
  • 32. Balance Sheet and Trends
    • Consumer loans
      • Primarily motor vehicle loans and leases.
      • Recent low auto finance company rates are anomalous — partly due to 9/11 effects.
        • Attempts to boost new vehicle sales via 0.0% loans lasted into 2004.
        • By 2003, rates 3.5% lower than banks on new vehicle rates
    07/09/10 08:28
  • 33. Consumer loans (continued)
    • Generally riskier customers than banks serve.
      • Subprime mortgage lenders
      • Jayhawk Acceptance Corp.
        • From auto loans to tummy tucks and nose jobs
    • Increase in “loan shark” firms with rates as high as 30% or more.
    • Other consumer loans about 24.7% of consumer loan portfolio, 2003.
    07/09/10 08:28
  • 34. Balance Sheet and Trends
    • Mortgages
      • Recent addition to finance company assets
      • Smaller regulatory burden than banks
      • May be direct mortgages, or as securitized mortgage assets.
      • Growth in home equity loans since passage of Tax Reform Act of 1986.
        • Tax deductibility issue.
        • Conversion of credit card debt
        • 2003 average home equity loan $69,513
    07/09/10 08:28
  • 35. Web Resources
    • For information on home equity loans, visit the Consumer Bankers Association at:
    • www.cbanet.org
    07/09/10 08:28
  • 36. Business Loans
    • Business loans comprise largest portion of finance company loans.
    • Advantages over commercial banks:
      • Fewer regulatory impediments to types of products and services.
      • Not depository institutions hence less regulatory scrutiny and lower overheads.
      • Often have substantial expertise and greater willingness to accept riskier clients.
    07/09/10 08:28
  • 37. Business Loans
    • Major subcategories:
      • Retail and wholesale motor vehicle loans and leases
      • Equipment loans
        • tax issues associated when finance company leases the equipment directly to the customer
      • Other business loans and securitized business assets
    07/09/10 08:28
  • 38. Liabilities
    • Major liabilities: commercial paper and other debt (longer-term notes and bonds).
    • Finance firms are largest issuers of commercial paper (frequently through direct sale programs).
      • Commercial paper maturities up to 270 days.
    • Consequently, management of liquidity risk differs from commercial banks relying on deposits
    07/09/10 08:28
  • 39. Industry Performance
    • Strong loan demand
    • Strong profits for the largest firms
      • e.g. Household International, Associates First Capital, Beneficial
      • Effects of low interest rates
    • Most successful have become takeover targets
      • Citigroup/Associates First Capital,
      • Household International/HSBC Holdings
    07/09/10 08:28
  • 40. Industry Performance
    • High risk has a downside:
      • Subprime lending: Jayhawk Acceptance Corporation
      • Cityscape Financial Corp., Aames Financial Corp., Advanta, FirstPlus Financial Group, The Money Store, Associates First Capital
      • FTC scrutiny of subprime lending practices violating Truth in Lending Act, Fair Credit Reporting Act, Equal Opportunity Act
      • 2002, Citigroup $200 million settlement for predatory lending via Associates First Capital
    07/09/10 08:28
  • 41. Electronic Lending
    • Mainly mortgages completed over the Internet
      • E-Loan
      • Suffered with the dot-com downturn
    07/09/10 08:28
  • 42. Web Resources
    • For additional information, visit:
    • www.household.com
    • www.firstunion.com
    • www.citigroup.com
    • www.ftc.gov
    07/09/10 08:28
  • 43. Regulation of Finance Companies
    • Federal Reserve definition of Finance Company
      • Firm, other than depository institution, whose primary assets are loans to individuals and businesses.
    • Subject to state-imposed usury ceilings.
    • Much lower regulatory burden than depository institutions.
      • Not subject to Community Reinvestment Act.
      • Lack the banks’ regulatory safety-net
    07/09/10 08:28
  • 44. Regulation
    • With less regulatory scrutiny, finance companies must signal safety and soundness to capital markets in order to obtain funds.
    • Lower leverage than banks (15.1% capital-assets versus 9.1% for commercial banks).
    • Captive finance companies may employ default protection guarantees from parent company or other protection such as letters of credit.
    07/09/10 08:28
  • 45. Global Issues
    • In foreign countries, Finance companies are generally subsidiaries of commercial banks or industrials
    • In Japan, ownership of finance companies by banks created opportunities when banks hit by increase in nonperforming loans
      • GE Capital/Japan Leasing Corporation
    07/09/10 08:28
  • 46. Pertinent Websites
    • Aames Financial Corp. www.aames.net
    • Advanta www.advanta.com
    • American General www.aigag.com
    • Federal Reserve www.federalreserve.gov
    • CIT Group www.citgroup.com
    • Citigroup www.citigroup.com
    • Consumer Bankers Association www.cbanet.org
    • Federal Trade Commission www.ftc.gov
    • First Union Bank www.firstunion.com
    07/09/10 08:28
  • 47. Pertinent Websites
    • Ford Motor Credit www.fordcredit.com
    • GE Capital Corp. www.ge.com
    • GMAC www.gmacfs.com
    • Household International www.household.com
    • The Wall Street Journal www.wsj.com
    07/09/10 08:28
  • 48. Team Names for Paper & Presentation?
    • Names are due NEXT CLASS .
    • The Finished Paper is due February 28 th ,
    • at the Start of Class.
    • Your Presentations will be done March 4 th & 6 th
    07/09/10 08:28