FINA 4310 Spring 2002 Chapter 4: Mutual Funds and Other Investment Companies
Investment Companies <ul><li>Unit Investment Trusts </li></ul><ul><li>Managed Investment Companies </li></ul><ul><ul><li>O...
Unit Investment Trusts <ul><li>Portfolio is fixed for the life of the trust </li></ul><ul><li>Fixed-Income UIT </li></ul><...
Mutual Funds <ul><li>Open-end funds </li></ul><ul><ul><li>Invest by sending money directly to the fund </li></ul></ul><ul>...
Types of Mutual Funds <ul><li>Equity Funds </li></ul><ul><li>Fixed-Income Funds </li></ul><ul><li>Money Market Funds </li>...
Equity Mutual Funds <ul><li>Aggressive Growth /Capital Appreciation </li></ul><ul><ul><li>Small companies/Narrow market se...
Balanced Funds <ul><li>Invests in both equities and fixed income securities </li></ul><ul><li>Proportion of stocks and bon...
Asset Allocation Fund <ul><li>Like Balanced Funds, hold both stocks and bonds </li></ul><ul><li>Proportion of stocks vs. b...
Index Funds <ul><li>Passive Management </li></ul><ul><li>Goal is to match the performance of a benchmark index </li></ul><...
Specialized Funds <ul><li>Focus on a particular sector or industry </li></ul><ul><ul><li>Real Estate </li></ul></ul><ul><u...
Closed-end Funds <ul><li>Do not create or redeem shares </li></ul><ul><li>After initial offering, shares trade on secondar...
Real Estate Investment Trusts <ul><li>Like a closed-end fund </li></ul><ul><ul><li>Buy it on an exchange </li></ul></ul><u...
Exchange-traded Funds <ul><li>Like closed-end funds, they trade on an exchange </li></ul><ul><li>Like index funds, they te...
Commingled Funds <ul><li>Partnerships of investors that pool their funds </li></ul><ul><li>Similar to open-end mutual fund...
Hedge Funds <ul><li>Limited partnership of investors </li></ul><ul><ul><li>Accredited investors (high net worth) </li></ul...
Mutual Fund Fees <ul><li>Front-end load </li></ul><ul><li>Back-end load </li></ul><ul><li>12b-1 charges </li></ul><ul><li>...
Front-end Load <ul><li>This is a sales charge, or “commission” charged to enter a fund </li></ul><ul><li>Paid as a percent...
Back-end Load <ul><li>Also called: </li></ul><ul><ul><li>Redemption Fee </li></ul></ul><ul><ul><li>Contingent Deferred Sal...
12b-1 charges <ul><li>Managers can use up to 1% of the fund’s assets each year to pay for... </li></ul><ul><ul><li>Adverti...
Operating Expenses <ul><li>Administrative Expenses </li></ul><ul><li>Advisory fees paid to manager </li></ul><ul><li>Shoul...
Brokerage Commissions <ul><li>If your broker does not have an arrangement with the mutual fund management company, they wi...
Classes of Mutual Fund shares <ul><li>One fund can have multiple classes with different fees </li></ul><ul><ul><li>Class A...
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FINA 4310 Spring 2002 Chapter 4: Mutual Funds and Other ...

  1. 1. FINA 4310 Spring 2002 Chapter 4: Mutual Funds and Other Investment Companies
  2. 2. Investment Companies <ul><li>Unit Investment Trusts </li></ul><ul><li>Managed Investment Companies </li></ul><ul><ul><li>Open-end funds ( Mutual Funds ) </li></ul></ul><ul><ul><li>Closed-end funds </li></ul></ul><ul><li>Real Estate Investment Trusts (REITs) </li></ul><ul><li>Exchange-Traded Funds (ETFs) </li></ul><ul><li>Commingled Funds </li></ul><ul><li>Hedge Funds </li></ul>
  3. 3. Unit Investment Trusts <ul><li>Portfolio is fixed for the life of the trust </li></ul><ul><li>Fixed-Income UIT </li></ul><ul><ul><li>Government securities </li></ul></ul><ul><ul><li>Corporate bond </li></ul></ul><ul><ul><li>Municipal bond </li></ul></ul><ul><ul><li>International bond </li></ul></ul><ul><li>Equity UIT </li></ul>
  4. 4. Mutual Funds <ul><li>Open-end funds </li></ul><ul><ul><li>Invest by sending money directly to the fund </li></ul></ul><ul><ul><li>New units are created as new money flows in </li></ul></ul><ul><ul><li>Units retired as money flows out </li></ul></ul><ul><ul><li>Go in and out at Net Asset Value (NAV) </li></ul></ul><ul><li>Management companies – “Families” </li></ul><ul><ul><li>Fidelity </li></ul></ul><ul><ul><li>Vanguard Many Others </li></ul></ul>
  5. 5. Types of Mutual Funds <ul><li>Equity Funds </li></ul><ul><li>Fixed-Income Funds </li></ul><ul><li>Money Market Funds </li></ul><ul><li>Balanced Funds </li></ul><ul><li>Asset Allocation Funds </li></ul><ul><li>Index Funds </li></ul><ul><li>Specialized Funds </li></ul>
  6. 6. Equity Mutual Funds <ul><li>Aggressive Growth /Capital Appreciation </li></ul><ul><ul><li>Small companies/Narrow market sectors </li></ul></ul><ul><li>Growth </li></ul><ul><ul><li>Firms with good revenue & earnings potential </li></ul></ul><ul><li>Blend (Growth and Income) </li></ul><ul><ul><li>Combination of Growth and Value Stocks </li></ul></ul><ul><li>Value </li></ul><ul><ul><li>Profitable, Dividend-paying stocks </li></ul></ul><ul><ul><li>Stocks with low P/E ratios </li></ul></ul>
  7. 7. Balanced Funds <ul><li>Invests in both equities and fixed income securities </li></ul><ul><li>Proportion of stocks and bonds fairly stable over time </li></ul><ul><li>Designed to be an investor’s entire portfolio </li></ul><ul><li>Example: ARK Balanced Fund </li></ul>
  8. 8. Asset Allocation Fund <ul><li>Like Balanced Funds, hold both stocks and bonds </li></ul><ul><li>Proportion of stocks vs. bonds varies substantially over time </li></ul><ul><li>Manager tries to increase returns by timing the market </li></ul><ul><li>Example: Preferred Asset Allocation Fund </li></ul>
  9. 9. Index Funds <ul><li>Passive Management </li></ul><ul><li>Goal is to match the performance of a benchmark index </li></ul><ul><li>Low expenses </li></ul><ul><li>Most Popular Benchmark: S&P 500 Index </li></ul><ul><li>Example: Vanguard Index Funds </li></ul>
  10. 10. Specialized Funds <ul><li>Focus on a particular sector or industry </li></ul><ul><ul><li>Real Estate </li></ul></ul><ul><ul><li>Technology </li></ul></ul><ul><ul><li>Health Care </li></ul></ul><ul><ul><li>Utilities </li></ul></ul><ul><ul><li>Financial Services </li></ul></ul>
  11. 11. Closed-end Funds <ul><li>Do not create or redeem shares </li></ul><ul><li>After initial offering, shares trade on secondary market </li></ul><ul><li>To invest, buy shares on the exchange </li></ul><ul><li>May trade above or below NAV </li></ul><ul><ul><li>Above: Premium </li></ul></ul><ul><ul><li>Below: Discount </li></ul></ul>
  12. 12. Real Estate Investment Trusts <ul><li>Like a closed-end fund </li></ul><ul><ul><li>Buy it on an exchange </li></ul></ul><ul><li>Equity REITS </li></ul><ul><ul><li>Buy investment property </li></ul></ul><ul><li>Mortgage Trusts </li></ul><ul><ul><li>Buy mortgage loans </li></ul></ul>
  13. 13. Exchange-traded Funds <ul><li>Like closed-end funds, they trade on an exchange </li></ul><ul><li>Like index funds, they tend to be passively managed </li></ul><ul><li>A variety of legal forms: </li></ul><ul><ul><li>Unit Investment Trusts ( SPDRs , HOLDRs ) </li></ul></ul><ul><ul><li>Open-end Mutual funds ( iShares ) </li></ul></ul><ul><ul><li>Traditional mutual fund share class ( Vipers ) </li></ul></ul>
  14. 14. Commingled Funds <ul><li>Partnerships of investors that pool their funds </li></ul><ul><li>Similar to open-end mutual fund </li></ul><ul><li>Typically, small institutional investors </li></ul><ul><ul><li>Most commonly pension plans </li></ul></ul><ul><ul><li>Larger than typical individual investor </li></ul></ul><ul><ul><li>Too small to warrant individual management </li></ul></ul>
  15. 15. Hedge Funds <ul><li>Limited partnership of investors </li></ul><ul><ul><li>Accredited investors (high net worth) </li></ul></ul><ul><ul><li>Restricted to 499 partners </li></ul></ul><ul><ul><li>Cannot advertise </li></ul></ul><ul><ul><li>Less regulated than mutual funds </li></ul></ul><ul><ul><ul><li>Manager has freedom to follow a wider variety of investment strategies </li></ul></ul></ul><ul><ul><ul><li>fewer reporting requirements </li></ul></ul></ul>
  16. 16. Mutual Fund Fees <ul><li>Front-end load </li></ul><ul><li>Back-end load </li></ul><ul><li>12b-1 charges </li></ul><ul><li>Operating Expenses </li></ul><ul><li>Broker Commissions </li></ul>
  17. 17. Front-end Load <ul><li>This is a sales charge, or “commission” charged to enter a fund </li></ul><ul><li>Paid as a percentage of investment </li></ul><ul><li>Can be as large as 8.5% </li></ul><ul><li>Rarely higher than 6.25% </li></ul><ul><li>Often much lower, down to zero </li></ul><ul><li>“No Load Fund” means no front-end load </li></ul>
  18. 18. Back-end Load <ul><li>Also called: </li></ul><ul><ul><li>Redemption Fee </li></ul></ul><ul><ul><li>Contingent Deferred Sales Charge </li></ul></ul><ul><li>This is a fee charged when you exit the fund </li></ul><ul><li>Charged in percentage terms </li></ul><ul><li>Some funds have no back-end load </li></ul><ul><li>If they do, it often drops off gradually to zero the longer you hold the fund </li></ul><ul><li>Discourages investors with short horizons </li></ul>
  19. 19. 12b-1 charges <ul><li>Managers can use up to 1% of the fund’s assets each year to pay for... </li></ul><ul><ul><li>Advertising </li></ul></ul><ul><ul><li>Annual reports and prospectuses </li></ul></ul><ul><ul><li>Commissions paid to brokers </li></ul></ul><ul><li>Because these fees come straight from the fund’s assets, they are “hidden” costs to the investor </li></ul>
  20. 20. Operating Expenses <ul><li>Administrative Expenses </li></ul><ul><li>Advisory fees paid to manager </li></ul><ul><li>Should be less than 2% per year </li></ul><ul><li>Again, this comes out of the funds assets. (You don’t see them explicitly, but pay for them in the form of lower returns) </li></ul><ul><li>Measured by “expense ratio” </li></ul>
  21. 21. Brokerage Commissions <ul><li>If your broker does not have an arrangement with the mutual fund management company, they will charge you a commission to invest for you. </li></ul><ul><li>But, you do not need to go through a broker at all. You can buy (and redeem) shares directly from the mutual fund. </li></ul>
  22. 22. Classes of Mutual Fund shares <ul><li>One fund can have multiple classes with different fees </li></ul><ul><ul><li>Class A: Front-end load </li></ul></ul><ul><ul><li>Class B: Back-end load and 12b-1 </li></ul></ul><ul><ul><li>Class C: Higher 12b-1 fees </li></ul></ul><ul><li>Investor class and premium class shares </li></ul><ul><ul><li>Example: Vanguard “ Admiral ” Shares </li></ul></ul>
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