Mutual Funds and Other Investment Companies


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Mutual Funds and Other Investment Companies

  1. 1. Mutual Funds and Other Investment Companies CHAPTER 4
  2. 2. Types of Investment Companies <ul><li>Unit Investment Trusts </li></ul><ul><li>Managed Investment Companies </li></ul><ul><ul><li>Open-End (Mutual Funds) </li></ul></ul><ul><ul><li>Closed-End </li></ul></ul><ul><li>Other investment organizations </li></ul><ul><ul><li>REITs </li></ul></ul><ul><ul><li>Hedge Funds </li></ul></ul>
  3. 3. Services of Investment Companies <ul><li>Administration & record keeping </li></ul><ul><li>__________________________ </li></ul><ul><li>Professional management </li></ul><ul><li>Divisibility </li></ul><ul><li>Low transaction costs </li></ul>
  4. 4. Net Asset Value <ul><li>NAV is basis for valuation of investment company shares: </li></ul><ul><ul><li>Selling new shares </li></ul></ul><ul><ul><li>Redeeming existing shares </li></ul></ul><ul><li>NAV equals: </li></ul><ul><li>Mkt Val of Assets - Liabilities </li></ul><ul><li> Shares Outstanding </li></ul>
  5. 5. Investment Companies <ul><li>Investment companies are exempt from _________________________________. </li></ul><ul><li>Investors pay income tax on income from investment companies. </li></ul><ul><li>Funds with high turnover result in high taxes (low tax efficiency). </li></ul><ul><li>Purchasing a mutual fund late in the year can result in taxes on earnings you did not receive. </li></ul>
  6. 6. Unit Investment Trusts <ul><li>A unit investment trust invests in a fixed pool of securities for a predetermined period of time. At the end of that time, assets are sold and investors receive NAV. </li></ul>
  7. 7. Open-End and Closed-End Funds: Key Differences <ul><li>Shares Outstanding </li></ul><ul><li>Closed-end: no change unless new stock is offered </li></ul><ul><li>Open-end: changes when new shares are sold or old shares are redeemed </li></ul><ul><li>Pricing </li></ul><ul><li>Open-end: Net Asset Value(NAV) </li></ul><ul><li>Closed-end: Price set in stock market, at premium or discount to NAV </li></ul>
  8. 8. Types of Investment Organizations <ul><li>REIT: ______________________________ </li></ul><ul><li>Equity REIT: invests in real estate </li></ul><ul><li>Mortgage REIT: invests in mortgages </li></ul>
  9. 9. Types of Investment Organizations <ul><li>Hedge Funds: little regulation </li></ul><ul><li>Limited to high net worth investors: </li></ul><ul><li>Net worth > $5 mil </li></ul><ul><li>Income > $200K </li></ul><ul><li>Annual fees are typically ______ of assets plus _______ of profit </li></ul>
  10. 10. Mutual Fund Types <ul><li>Mutual Funds can be classified by the assets held: </li></ul><ul><ul><li>Money Market </li></ul></ul><ul><ul><li>Fixed Income </li></ul></ul><ul><ul><li>Equity </li></ul></ul><ul><ul><li>Balance & Income </li></ul></ul><ul><ul><li>Index </li></ul></ul><ul><ul><li>Specialized Sector </li></ul></ul>
  11. 11. Investment Policies <ul><li>Index funds (including most Exchange Traded Funds, or ETFs) are not actively managed; they simply match an index </li></ul><ul><li>Actively managed funds attempt to increase returns by market timing (asset allocation funds) and/or security selection </li></ul>
  12. 12. Exchange Traded Funds <ul><li>ETFs are closed-end funds </li></ul><ul><li>Examples - SPDRs 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 fees </li></ul></ul><ul><li>Potential disadvantages </li></ul><ul><ul><li>Must pay brokerage commission </li></ul></ul><ul><ul><li>Price can differ from NAV </li></ul></ul>
  13. 13. Mutual Fund Types <ul><li>Equity fund by investment objective </li></ul><ul><ul><li>Aggressive growth </li></ul></ul><ul><ul><li>Growth </li></ul></ul><ul><ul><li>Growth & income </li></ul></ul><ul><ul><li>Equity income </li></ul></ul>
  14. 14. Table 4.1 Classification of U.S. Mutual Funds
  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 funds </li></ul><ul><ul><li>Potential conflicts of interest </li></ul></ul><ul><li>Financial supermarkets (Schwab’s OneSource) </li></ul>
  16. 16. Potential Conflicts of Interest - Revenue Sharing <ul><li>Brokers put investors in funds that may not be the most appropriate </li></ul><ul><li>Mutual funds could direct trading to higher cost brokers </li></ul><ul><li>Revenue sharing is not illegal but should be disclosed to the investor </li></ul>
  17. 17. Costs of Investing in Mutual Funds <ul><li>Fee Structure </li></ul><ul><ul><li>Front-end load (up to 8.5%) </li></ul></ul><ul><ul><li>Back-end load (up to 6%) </li></ul></ul><ul><li>Operating expenses </li></ul><ul><li>12 b-1 charges (up to 1% of assets annually) </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. Table 4.2 Impacts of Costs on Investment Performance
  19. 19. First Look at 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>
  20. 20. Figure 4.3 Percentage of Funds Below Wilshire 5000
  21. 21. Table 4.4 Consistency of Investment Results
  22. 22. Sources of Information on Mutual Funds <ul><li>Morningstar ( </li></ul><ul><li>Value Line Mutual Fund Survey </li></ul><ul><li>Wiesenberger’s Investment Companies </li></ul><ul><li>Yahoo ( </li></ul><ul><li>Investment Company Institute </li></ul><ul><li>Popular press (Business Week, Barron’s) </li></ul>
  23. 23. How to Pick a Mutual Fund <ul><li>In comparing mutual funds, look for: </li></ul><ul><ul><li>Matches your investment ________________ and _______________ tolerance </li></ul></ul><ul><ul><li>Good _____________________________ for several years </li></ul></ul><ul><ul><li>Same portfolio manager </li></ul></ul><ul><ul><li>No ______________ </li></ul></ul><ul><ul><li>Low ______________ (including 12b-1) </li></ul></ul><ul><ul><li>Tax efficiency (unless IRA or 401k) </li></ul></ul>