Mutual Funds and Other Investment Companies CHAPTER 4
4.1  INVESTMENT COMPANIES
Investment Companies <ul><li>Administration & record keeping </li></ul><ul><li>Diversification & divisibility </li></ul><u...
Investment Companies: Net Asset Value <ul><li>Net Asset Value </li></ul><ul><ul><li>Used as a basis for valuation of inves...
4.2  TYPES OF INVESTMENT COMPANIES
Unit Trusts <ul><li>Pools of money fixed for the life of the fund </li></ul><ul><li>Little active management </li></ul>
Managed Investment Companies: Open-End and Closed-End <ul><li>Open-End </li></ul><ul><ul><li>Sold at Net Asset Value (NAV)...
Figure 4.1 Closed-End Mutual Funds
Other Investment Organizations <ul><ul><li>Commingled funds </li></ul></ul><ul><ul><li>REITs </li></ul></ul><ul><ul><li>He...
4.3  MUTUAL FUNDS
Investment Policies <ul><li>Described in the prospectus </li></ul><ul><li>Management companies manage a family of mutual f...
Types of Mutual Funds <ul><li>Money Market  </li></ul><ul><li>Equity </li></ul><ul><li>Specialized Sector </li></ul><ul><l...
Types of Mutual Funds <ul><li>Balanced Funds </li></ul><ul><li>Asset Allocation and Flexible </li></ul><ul><li>Indexed  </...
Table 4.1 Mutual Funds by Investment Classification
How Funds Are Sold <ul><li>Directly marketed </li></ul><ul><li>Sales force distributed </li></ul><ul><li>Revenue sharing o...
4.4  COSTS OF INVESTING IN MUTUAL FUNDS
Fee Structure <ul><li>Fee Structure </li></ul><ul><ul><li>Front-end load </li></ul></ul><ul><ul><li>Back-end load </li></u...
Example 4.1 From Text
Fees and Mutual Fund Returns
Fees and Mutual Fund Returns: An Example <ul><li>Initial NAV = $20 </li></ul><ul><li>Income distributions of $.15 </li></u...
Table 4.2 Impacts of Costs on Investment Performance
Trading Scandal with Mutual Funds <ul><li>Late trading – allowing some investors to purchase or sell after the market clos...
Potential Reforms <ul><li>Strict 4:00 PM cutoff with late orders executed the following trading day </li></ul><ul><li>Fair...
4.5  TAXATION OF MUTUAL FUND INCOME
Taxation of Mutual Fund Income <ul><li>Investor directed portfolios can be structured to take advantage of taxes while mut...
4.6  EXCHANGE-TRADED FUNDS
Exchange Traded Funds <ul><li>ETF allow investors to trade index portfolios like shares of stock </li></ul><ul><li>Example...
4.7  MUTUAL FUND INVESTMENT PERFORMANCE:  A FIRST LOOK
Mutual Fund Performance <ul><li>Evidence shows that average mutual fund performance is generally less than broad market pe...
Figure 4.2 Diversified Equity Funds Versus Wilshire 5000 Index
Table 4.4 Consistency of  Investment Results
4.8  INFORMATION ON MUTUAL FUNDS
Sources of Information  <ul><li>Wiesenberger’s Investment Companies </li></ul><ul><li>Morningstar ( www.morningstar.com ) ...
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Chapter 04

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Chapter 04

  1. 1. Mutual Funds and Other Investment Companies CHAPTER 4
  2. 2. 4.1 INVESTMENT COMPANIES
  3. 3. Investment Companies <ul><li>Administration & record keeping </li></ul><ul><li>Diversification & divisibility </li></ul><ul><li>Professional management </li></ul><ul><li>Reduced transaction costs </li></ul>
  4. 4. Investment Companies: Net Asset Value <ul><li>Net Asset Value </li></ul><ul><ul><li>Used as a basis for valuation of investment company shares </li></ul></ul><ul><ul><li>Selling new shares </li></ul></ul><ul><ul><li>Redeeming existing shares </li></ul></ul><ul><li>Calculation: </li></ul><ul><li>Market Value of Assets - Liabilities </li></ul><ul><li> Shares Outstanding </li></ul>
  5. 5. 4.2 TYPES OF INVESTMENT COMPANIES
  6. 6. Unit Trusts <ul><li>Pools of money fixed for the life of the fund </li></ul><ul><li>Little active management </li></ul>
  7. 7. Managed Investment Companies: Open-End and Closed-End <ul><li>Open-End </li></ul><ul><ul><li>Sold at Net Asset Value (NAV) </li></ul></ul><ul><ul><li>Changes when new shares are sold or old shares are redeemed </li></ul></ul><ul><li>Closed-End </li></ul><ul><ul><li>Sold at premium or discount to NAV </li></ul></ul><ul><ul><li>No change unless new stock is offered </li></ul></ul>
  8. 8. Figure 4.1 Closed-End Mutual Funds
  9. 9. Other Investment Organizations <ul><ul><li>Commingled funds </li></ul></ul><ul><ul><li>REITs </li></ul></ul><ul><ul><li>Hedge Funds </li></ul></ul>
  10. 10. 4.3 MUTUAL FUNDS
  11. 11. Investment Policies <ul><li>Described in the prospectus </li></ul><ul><li>Management companies manage a family of mutual funds. Some examples include: </li></ul><ul><ul><li>Fidelity </li></ul></ul><ul><ul><li>Vanguard </li></ul></ul><ul><ul><li>Putnam </li></ul></ul><ul><ul><li>Dreyfus </li></ul></ul>
  12. 12. Types of Mutual Funds <ul><li>Money Market </li></ul><ul><li>Equity </li></ul><ul><li>Specialized Sector </li></ul><ul><li>Bond </li></ul>
  13. 13. Types of Mutual Funds <ul><li>Balanced Funds </li></ul><ul><li>Asset Allocation and Flexible </li></ul><ul><li>Indexed </li></ul><ul><li>International </li></ul>
  14. 14. Table 4.1 Mutual Funds by Investment Classification
  15. 15. How Funds Are Sold <ul><li>Directly marketed </li></ul><ul><li>Sales force distributed </li></ul><ul><li>Revenue sharing on sales force distributed </li></ul><ul><ul><li>Potential conflicts of interest </li></ul></ul><ul><ul><li>It must be disclosed to the investor </li></ul></ul><ul><li>Financial supermarkets </li></ul>
  16. 16. 4.4 COSTS OF INVESTING IN MUTUAL FUNDS
  17. 17. Fee Structure <ul><li>Fee Structure </li></ul><ul><ul><li>Front-end load </li></ul></ul><ul><ul><li>Back-end load </li></ul></ul><ul><li>Operating expenses </li></ul><ul><li>12 b-1 charges </li></ul><ul><ul><li>distribution costs paid by the fund </li></ul></ul><ul><ul><li>Alternative to a load </li></ul></ul><ul><li>Fees and performance </li></ul>
  18. 18. Example 4.1 From Text
  19. 19. Fees and Mutual Fund Returns
  20. 20. Fees and Mutual Fund Returns: An Example <ul><li>Initial NAV = $20 </li></ul><ul><li>Income distributions of $.15 </li></ul><ul><li>Capital gain distributions of $.05 </li></ul><ul><li>Ending NAV = $20.10: </li></ul>
  21. 21. Table 4.2 Impacts of Costs on Investment Performance
  22. 22. Trading Scandal with Mutual Funds <ul><li>Late trading – allowing some investors to purchase or sell after the market closes </li></ul><ul><li>Market timing – allowing investors to buy or sell on stale net asset values </li></ul><ul><ul><li>International </li></ul></ul><ul><li>Net effect is to transfer value from other shareholders to privileged traders </li></ul><ul><ul><li>Reduction in the rate of return of the mutual fund </li></ul></ul>
  23. 23. Potential Reforms <ul><li>Strict 4:00 PM cutoff with late orders executed the following trading day </li></ul><ul><li>Fair value pricing with net asset values being adjusted for trading in open markets </li></ul><ul><li>Imposition of redemption fees </li></ul>
  24. 24. 4.5 TAXATION OF MUTUAL FUND INCOME
  25. 25. Taxation of Mutual Fund Income <ul><li>Investor directed portfolios can be structured to take advantage of taxes while mutual funds cannot </li></ul><ul><li>High turnover leads to tax inefficiency </li></ul><ul><li>More disclosure on taxes was required in 2000 </li></ul>
  26. 26. 4.6 EXCHANGE-TRADED FUNDS
  27. 27. Exchange Traded Funds <ul><li>ETF allow investors to trade index portfolios like shares of stock </li></ul><ul><li>Examples – SPDRs, Diamonds, and WEBS </li></ul><ul><li>Potential advantages </li></ul><ul><ul><li>Trade continuously </li></ul></ul><ul><ul><li>Lower taxes </li></ul></ul><ul><ul><li>Lower costs </li></ul></ul><ul><li>Potential disadvantages </li></ul>
  28. 28. 4.7 MUTUAL FUND INVESTMENT PERFORMANCE: A FIRST LOOK
  29. 29. Mutual Fund Performance <ul><li>Evidence shows that average mutual fund performance is generally less than broad market performance </li></ul><ul><li>Evidence suggests that over certain horizons some persistence in positive performance </li></ul><ul><ul><li>Evidence is not conclusive </li></ul></ul><ul><ul><li>Some inconsistencies </li></ul></ul>
  30. 30. Figure 4.2 Diversified Equity Funds Versus Wilshire 5000 Index
  31. 31. Table 4.4 Consistency of Investment Results
  32. 32. 4.8 INFORMATION ON MUTUAL FUNDS
  33. 33. Sources of Information <ul><li>Wiesenberger’s Investment Companies </li></ul><ul><li>Morningstar ( www.morningstar.com ) </li></ul><ul><li>Yahoo ( finance.yahoo.com /funds ) </li></ul><ul><li>Investment Company Institute </li></ul><ul><li>Popular press </li></ul><ul><li>Investment services </li></ul>

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