1. Managing Your Mutual FundSuggested Grade and Mastery LevelMiddle School – all levelsSuggested TimeDuration of the gameProject BackgroundThis project gives SMG teams the opportunity to assume the roles of mutual fund managers.During the trading session, teams will define the investment philosophies and goals that willguide the selection of securities for the mutual fund portfolios they create.Each week teams will collect, compile, and report their respective mutual fund portfolio’sperformance as if they were reporting to their investors. Early in the project it isrecommended students create a prospectus for their mutual fund. The prospectus for themutual fund will include the funds investment objective or philosophy, holdings, performanceusing total return, selected stocks, income statements, and balance sheets.At the end of the trading session, teams will develop their ”annual” report from theaccumulated weekly data as an authentic assessment of their mutual fund portfolio. Themutual fund they have created can also be marketed to the class through a sales presentationand/or Web site using information from the prospectus and annual report.Teacher BackgroundAccording to the Dictionary of Financial Terms, “a mutual fund is a professionally managedinvestment that pools the capital of thousands of investors.” Each fund has a professionalmanger and an investment plan that it follows in building the portfolio. An introductory lessonabout mutual funds can be found among the core lessons of The Stock Market Game. The teamportfolios also have a section dedicated to teaching students about mutual funds.A prospectus for a mutual fund provides a roadmap of a fund – covering everything from itsobjectives and fees to the performance of portfolio holdings and manager. An annual report isa yearly record of a publicly held companys financial condition. It includes a description of thefirms operations, as well as balance sheet, income statement, and cash flow statementinformation. The Securities and Exchange Commission (SEC) rules require that an annual reportbe distributed to all shareholders. Mutual funds also issue an annual report like othercompanies. Investors use both annual reports and prospectuses to gather information about thehealth of a company before investing in them. An introductory lesson about annual reports canbe found among the core lessons of The Stock Market Game.Additional information is available atPath to Investing - http://www.pathtoinvesting.orgYahoo! Finance – http://finance.yahoo.comMorningstar – http://www.morningstar.comVocabulary:Mutual Funds: Mutual funds are pools of money that are managed by an investment company.Portfolio: A collection of investments. 1 of 14 © 2006 Foundation for Investor Education. All Rights Reserved.
2. Annual Report: Yearly record of a publicly held companys financial condition. It includes adescription of the firms operations, as well as balance sheet, income statement, and cash flowstatement information. SEC rules require that it be distributed to all shareholders.Prospectus: The prospectus of a mutual fund provides a roadmap of a fund – coveringeverything from its objective and fees to its performance and manager.Securities and Exchange Commission (SEC): A federal agency that regulates the U.S. financialmarkets. The SEC also oversees the securities industry and promotes full disclosure in order toprotect the investing public against malpractice in the securities markets.Philosophy: The philosophy of doing business describes your investment objectives.Investment objectives fit into one of three basic goals: income, income and growth, or growth.The risk factor is also a component of the investment objective.Holdings: A list of stocks currently owned by the mutual fund.Performance: Whether the fund is meeting your investment goal. The most accurate measureof a mutual fund’s past and current performance is its total return, or its increase in value plusits reinvested distributions.Income Statement: A financial summary of the revenues and expenses of a company during anaccounting period.Balance Sheet: A financial report showing the status of a company’s assets, liabilities, andowners’ equity on a given date.Performance Objectives:Students will be able to: Define and demonstrate comprehension of the following terms: mutual funds, portfolio, annual report, prospectus, SEC, philosophy, holdings, performance, income statement, balance sheet. Collect and organize data to include in the prospectus and/or annual report. Summarize data in letter, chart and graph form. Calculate performance using total return. Evaluate data to determine if investment objectives and philosophy were met. Write an explanation of performance and fund strategy. Create and explain an prospectus and/or annual report for their mutual fund.Subject AreaEconomics, Business, Social Studies, Math, English / Language ArtsMaterials Registered teams with The Stock Market Game. Computers with spreadsheet and word processing programs. Computers with Internet access. An annual report from a mutual fund company or view a copy from the Internet. Team journals Activity SheetsSpringboard ActivityAsk each student in the class to give $0.50 to purchase supplies for a class party. The classselects four students to make the purchasing decisions. Only students who mutually funded theparty receive the goods purchased. If the four students managing the money don’t spend itwisely or lose all the money we will not have much of a party 2 of 14 © 2006 Foundation for Investor Education. All Rights Reserved.
3. Explain this is how a mutual fund works. People with similar investing objectives give moneyto a group of individuals called mutual fund managers who are hired to invest the funds onbehalf of the group. The earnings from the investments are distributed back to the people whomutually funded it. The more money the mutual fund makes the more the individual investorsmake.Now have SMG teams login to their portfolios and click on the Mutual Funds tab. Each teamshould research the characteristics of mutual funds and compare and contrast the stockselections of two funds. Each team should then generate a list of ideas for creating their ownmutual fund.ActivitiesCreating a Prospectus Ask: Based on the your research about mutual funds and your initial experience in the SMG, what would you want to know as an investor before you gave money to a mutual fund manager? Would you want to know about the investment objectives, performance, and/or financial statements? How would this information be communicated to potential investors?To begin their prospectus, have students write a summary on what their team has agreed on asa management philosophy. This philosophy should consider: What is you investment objective? Provide income, some income and growth, or future growth. What is your risk factor? Conservative, moderate, or speculative?After agreeing on a management philosophy, teams need to name their fund. The name shouldreflects their philosophy. Teams should list the stocks or types of stock they plan to invest in.Their list should include a description of how their chosen stocks are performing at present.This could be done on a spreadsheet along with a pie chart, illustrating the team’s investmentstrategy. Teams should present this information in a pamphlet intended for potentialinvestors. The pamphlet might also include the management fees they would charge.Additional mutual fund resources are available atPath to Investing - http://www.pathtoinvesting.orgYahoo! Finance – http://finance.yahoo.comMorningstar – http://www.morningstar.comManaging the FundEach week of the SMG trading session: Divide students into their SMG teams. Teams should print the current week’s transaction history. Teams should record their meeting minutes in their team journals.Teams should address the following questions in their team journals: How well is your mutual fund portfolio performing? Are you doing better or worse than the Dow? S & P? Other similar mutual funds? (Maybe you want to include some graphs or charts) 3 of 14 © 2006 Foundation for Investor Education. All Rights Reserved.
4. Is your portfolio following the objectives of your mutual fund? Do you need to make changes? If so, what changes are you going to make and why? Are there current events affecting the performance of your stocks? To what extent should you be considering the impact of these world and national events in the stock selection for this mutual fund portfolio?Risk vs. RewardHave teams complete Activity Sheet 1. Teams should also print the Transaction History pageof their portfolio and compile a list of the top ten companies in their Account Holdings indescending order from largest to smallest. They will create a chart and graph of their portfolioholdings.Calculating Total ReturnHave teams complete Activity Sheet 2. Ask: Which funds would have been acceptable if the overall market had increased by 6% over the same time period? Why or why not?Have students calculate past performance by calculating the total return of their investmentsCreating Financial StatementsHave teams complete Activity Sheet 3. Afterwards, direct them to Yahoo! Finance and havethem enter the stock symbol they selected. Once the quote and information page for theircompany loads, teams should click on income statement and balance sheet links on the left-hand side of the page.Have each team chose two of the stocks in their portfolio and create a three-year analysis ofthe income statement and balance sheet.Designing an Annual Report CoverHave teams review and critique different covers of annual reports. Annual Reports.com is agood resource for this activity: http://www.annualreports.com. Ask: What messages do the covers convey about the company? Are they accurate What images would portray a conservative/income fund? What images would portray an aggressive/growth fund?Have students design a cover for their mutual fund. Their design should accurately portraytheir investment philosophy. Afterwards, teams should write a summary to their shareholderswith their final performance and holdings. Include a summary of why decisions were made tobuy or sell stocks and any changes that would be made to the fund in the future.Authentic AssessmentsAnnual ReportUse the Annual Report Rubric to create an annual report for your mutual fund. Teams shouldprepare a sales presentation or website to market their mutual fund based on the annualreport. 4 of 14 © 2006 Foundation for Investor Education. All Rights Reserved.
5. Letter to Distraught InvestorInform your teams that their investors are complaining about the yields on their mutual fundportfolios. Have them prepare a plan to improve short-term gains so they can produce profitsfor the next quarter. Teams should also write a letter to investors sharing the new mutual fundinvestment strategyStarting FreshHave teams decide what approach they would take if they had a chance to start over with anew portfolio. Students should include changes in philosophy as well as direct references to keybuying decisions for their portfolios. 5 of 14 © 2006 Foundation for Investor Education. All Rights Reserved.
6. Activity Sheet 1: Risk vs. Reward The following chart shows how as investment risk increases so does the reward. The lower the investment risk, the lower the investment reward is. Junk Bonds High Risk Commodities High Risk High Return Art, Metals High Return Futures, Options Aggressive Mutual Funds Small Cap Funds Growth Stock Growth Mutual Funds Moderate Risk Rental Property Moderate Risk Moderate Return Index Funds Moderate Return Growth and Income Funds Balanced Mutual Funds Municipal Bonds U.S. Gov. Notes and Bonds Utility Stocks Convertible Bonds Low Risk Treasury Bills Low Risk Low Return Money Market Low Return Certificate of Deposit Using Yahoo! Finance as a resource, put the following investments in order from highest risk to lowest risk:Pork Bellies Nations Bank 1yr CD Bond BB- Rating DuplexCitibank Money Market GE common stock New York Gas and Electric Stock FDSCXJORNX UPS stock option American Balanced Fund Treasury NoteU.S. Treasury Bill Prudential Convertible Chicago City Bond Gold BondKNIPX AVEIX The Income Fund of America © 2006 Foundation for Investor Education. All Rights Reserved.
7. Activity Sheet 1 Answer Key Junk Bonds Bond BB- Rating High Risk Commodities High Risk Pork Bellies High Return Art, Metals High Return Gold Futures, Options UPS stock option Aggressive Mutual Funds AVEIX Small Cap Funds FDSCX Growth Stock GE common stock Growth Mutual Funds JORNX Moderate Risk Rental Property Moderate Risk DuplexModerate Return Index Funds Moderate Return KNIPX The Income Fund of Growth and Income Funds America American Balanced Balanced Mutual Funds Fund Municipal Bonds Chicago City Bond U.S. Gov. Notes and Bonds Treasury Note New York Gas and Utility Stocks Electric Stock Prudential Convertible Convertible Bonds Bond Low Risk Treasury Bills Low Risk U.S. Treasury Bill Low Return Money Market Low Return Citibank Money Market Certificate of Deposit Nations Bank 1yr CD © 2006 Foundation for Investor Education. All Rights Reserved.
8. Activity Sheet 2: Calculating Percentage Returns The most accurate measure of a mutual fund’s past and current performance is its percentage of return, or its increase in value plus its reinvested distributions. Change in value + dividends ----------------------------------------------- x 100 = Percentage Return (%) Cost of initial investment For example, an $8,000 investment with a one-year total return of $1,250 ($1,000 increase in value plus $250 in reinvested distributions) has an annual percentage return of 15.6% $1,250 ------------ x 100= 15.6% $8,000 Calculate the total return for the following problems:Mutual Fund Name Initial Investment Change in value Dividends Percentage ReturnFidelity Growth Fund $10,000.00 $1,700.00 $100.00Janice Bond Fund $55,000.00 $5,000.00 $300.00American Small Cap Fund $30,000.00 -$1,500.00 $400.00Aim Income Fund $25,000.00 $400.00 $0.00Vanguard Index Fund $40,000.00 $6,000.00 $270.00USB Large Cap Fund $15,000.00 $5,000.00 $400.00Met Life Aggressive Fund $8,000.00 $900.00 $100.00 © 2006 Foundation for Investor Education. All Rights Reserved.
9. Activity Sheet 2 Answer KeyMutual Fund Name Initial Investment Change in value Dividends Total ReturnFidelity Growth Fund $10,000.00 $1,700.00 $100.00 18.00%Janice Bond Fund $55,000.00 $5,000.00 $300.00 9.64%American Small Cap Fund $30,000.00 -$1,500.00 $400.00 -3.67%Aim Income Fund $25,000.00 $400.00 $0.00 1.60%Vanguard Index Fund $40,000.00 $6,000.00 $270.00 15.68%USB Large Cap Fund $15,000.00 $5,000.00 $400.00 36.00%Met Life Aggressive Fund $8,000.00 $900.00 $100.00 12.50% © 2006 Foundation for Investor Education. All Rights Reserved.
10. Activity Sheet 3: Financial Statements Microsoft Corporation Income StatementPERIOD ENDING 30-Jun-05 30-Jun-04 30-Jun-03Total Revenue 39,788,000 36,835,000 32,187,000Cost of Revenue 6,200,000 6,716,000 5,686,000Gross Profit 33,588,000 30,119,000 26,501,000 Operating Expenses Research Development 6,184,000 7,779,000 4,659,000 Selling General and Administrative 12,843,000 13,306,000 8,625,000 Total Operating Expenses 19,027,000 21,085,000 13,284,000Operating Income or Loss 14,561,000 9,034,000 13,217,000 Income from Continuing Operations Total Other Income/Expenses Net 2,067,000 3,162,000 1,509,000 Earnings Before Interest And Taxes 16,628,000 12,196,000 14,726,000 Income Before Tax 16,628,000 12,196,000 14,726,000 Income Tax Expense 4,374,000 4,028,000 4,733,000 Net Income From Continuing Ops 12,254,000 8,168,000 9,993,000Net Income 12,254,000 8,168,000 9,993,000Income Statement Questions: 1. What is the total revenue Microsoft earned in 2005? 2. What is the total expense Microsoft earned in 2004? 3. Is the three-year revenue trend favorable for Microsoft? Why? 4. Is the three-year net income trend favorable for Microsoft? Why? © 2006 Foundation for Investor Education. All Rights Reserved.
11. Microsoft Balance SheetPERIOD ENDING 30-Jun-05 30-Jun-04 30-Jun-03AssetsCurrent Assets Cash And Cash Equivalents 4,851,000 15,982,000 6,438,000 Short Term Investments 32,900,000 44,610,000 42,610,000 Net Receivables 8,881,000 7,987,000 7,702,000 Inventory 491,000 421,000 640,000 Other Current Assets 1,614,000 1,566,000 1,583,000Total Current Assets 48,737,000 70,566,000 58,973,000Long Term Investments 11,004,000 12,210,000 13,692,000Property Plant and Equipment 2,346,000 2,326,000 2,223,000Goodwill 3,309,000 3,115,000 3,128,000Intangible Assets 499,000 569,000 384,000Accumulated Amortization - - -Other Assets 1,299,000 1,774,000 1,171,000Deferred Long Term Asset Charges 3,621,000 1,829,000 -Total Assets 70,815,000 92,389,000 79,571,000LiabilitiesCurrent Liabilities Accounts Payable 5,768,000 6,534,000 5,033,000 Other Current Liabilities 11,109,000 8,435,000 8,941,000Total Current Liabilities 16,877,000 14,969,000 13,974,000Long Term Debt - - -Other Liabilities 4,158,000 2,595,000 2,846,000Deferred Long Term Liability Charges 1,665,000 - 1,731,000Total Liabilities 22,700,000 17,564,000 18,551,000Stockholders EquityCommon Stock 60,413,000 56,396,000 35,344,000Retained Earnings -12,298,000 18,429,000 25,676,000Total Stockholder Equity 48,115,000 74,825,000 61,020,000Net Tangible Assets $44,307,000 $71,141,000 $57,508,000 © 2006 Foundation for Investor Education. All Rights Reserved.
12. Balance Sheet Questions: 1. Is the three-year trend for total liabilities favorable for Microsoft? Why? 2. Is the three-year trend for total assets favorable for Microsoft? Why? 3. What is the current ratio for 2005? Is that above or below the industry average? 4. What is the quick ratio for 2005? Is that above or below the industry average? © 2006 Foundation for Investor Education. All Rights Reserved.
13. Income Statement and Balance Sheet Answer KeyIncome Statement Questions:What is the total revenue Microsoft $39,788,000earned in 2005?What is the total expense Microsoft $21,085,000earned in 2004?Is the three-year revenue trend Yes, it has increased for the last twofavorable for Microsoft? Why? years 8% and 14%Is the three-year net income trend It increased 50% last year butfavorable for Microsoft? Why? decreased 18% in 2004Balance Sheet Questions:Is the three-year trend for total liabilities No, liabilities increased $5,135,000 lastfavorable for Microsoft? Why? year after decreasing $987,000 the year before.Is the three-year trend for total assets No, total assets decreasedfavorable for Microsoft? Why? $21,574,000 last year after increasing $12,818,000 the year before.What is the current ratio for 2005? Is 2.89 to 1, this is above the industrythat above or below the industry standard of 2 to 1.average?What is the quick ratio for 2005? Is 2.76 to 1, this is above the industrythat above or below the industry standard of 1 to 1.average? © 2006 Foundation for Investor Education. All Rights Reserved.
14. Students Name Annual Report Rubric Project Requirements Exceeded Requirements Met Requirements Needs Work to Meet RequirementsDemonstrates vocabulary comprehensionSummary of management philosophyCollects and organizes data which include: a. Transaction history for duration of game b. List of top ten account holdings c. Chart and graph of holdingsCalculates performance using total returnLetter explaining how well Investment objectivesand philosophy have been metOptional: a.Chart of past three-year stock performance of major holdings b. Annual report cover © 2006 Foundation for Investor Education. All Rights Reserved.