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  • 1.  
  • 2. Mutual Funds
    • Diversification opportunities enhanced for small investors
      • Economies of scale
      • Predominantly open-ended funds, also
        • Closed-end
        • ETF
  • 3. 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: $0.5 billion.
        • 1990: $1,065.2 billion
        • 2000: $6,964.6 billion
        • 2006: $10,413.7
      • Institutional funds
        • 80 percent of retirement plan investments
  • 4. 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 2006, insurance companies managed approximately 10% of mutual fund assets
  • 5. From Ch 1
  • 6.  
  • 7. Mutual Funds As Retirement Assets Source: Investment Company Institute
  • 8. Mutual Funds
    • Rapid growth in funds during the 1980s &1990’s
    • Slower rate of growth in the industry in early 2000s than in 1990s
      • Trading abuses contributed to slowdown
    • 2007:
      • Almost 7,100 stock and bond mutual companies.
      • Total assets of $8.21 trillion.
      • 8,125 firms and $10.57 trillion if money market mutual funds included
  • 9.  
  • 10.  
  • 11.  
  • 12.  
  • 13. Mutual Fund Business Functions Product Design Processing Investment Management Investors Distribution
  • 14. Mutual Fund Scoreboard Advantages:
    • Diversification
    • Professional mgt
    • Convenience
    • Cost saving
    Disadvantages:
    • No Intra-day trading in traditional funds
    • Cost saving not passed on
    • Potential tax issues
    • Poorly defined objectives
    5. Liquidity 6. Easy indexing 7. Reliable return data 8. Payment Mechanism
  • 15. 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
      • 75.4% in 2006
    • Types of Long-term Funds:
      • Bond and income funds.
      • Equity funds.
      • Hybrid.
  • 16. Types of Mutual Funds
    • Short-term funds
      • 25.7% of assets, 1999.
      • 37.9% of assets, 2002.
      • 24.6% in 2006
      • Taxable and tax-exempt MMMFs
      • Generally higher returns than bank deposits but uninsured.
    • Impact of low interest rates during early to mid 2000s
      • Decline in MMMFs
      • Lowering of MMMF fees
  • 17. Overview of Mutual Funds
      • Objectives (and adherence to stated objectives), rates of return and risk characteristics vary.
    • Examples:
      • Capital appreciation funds (US Equity)
      • World equity
      • Corporate bond
      • High-yield bond
      • World bond
      • Government bond
  • 18. Mutual Fund Assets By Asset Class
  • 19. Balance Sheet and Trends
    • Money Market Funds
      • Key assets are short-term securities (consistent with deposit-like nature)
        • 2006: $1,514.9 billion (65.5% of total assets)
      • Most have share values fixed at $1 and adjust number of shares owned by the investor.
  • 20. Balance Sheet and Trends
    • Long-term Funds
      • Stocks comprised over 70.7 % of asset portfolios in 2006.
      • Credit market instruments 27.2% of asset portfolios
      • Shift to other securities such as credit market instruments, U.S. Treasuries, municipal bonds etc. when equity markets not performing as well.
  • 21. 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).
  • 22. Types of Funds
      • Open-ended funds: comparable to most corporate securities traded on stock exchanges.
      • Closed-end investment companies:
      • Fixed number of shares
        • Example: REITs.
        • May trade at premium or discount.
        • Exchange traded funds (ETFs)
      • Load versus no-load funds.
  • 23. Load Versus No-Load Fund Assets
  • 24. Mutual Fund Expenses
    • Front-end Loads
    • Back-end Loads
    • Annual Expenses
    • Expense Ratio (includes the following)
      • Management Fee
      • Operating Expenses
      • 12-b-1 Charges (Service/Load)
  • 25. 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.
  • 26. 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
  • 27. 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.
      • Sarbanes-Oxley Act of 2002
  • 28. Global Issues
    • Worldwide growth in mutual fund investment not as great as in the U.S.
      • $2.575 trillion in 1996 to $10.490 trillion in 2006
        • Over 307% growth
      • Larger returns in U.S.stock markets
      • Greatest development in countries with most advanced markets
      • Opportunities from declining Japanese markets
      • Efforts to reduce barriers for U.S. mutual fund sponsors
        • China and other Asian countries
  • 29. Web Resources
    • For information on the performance of mutual funds, visit:
    • Morningstar www.morningstar.com
  • 30. 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
      • Lack of correlation has not held up recently
  • 31. Hedge Funds Different From Mutual Funds
    • Investment by manager
    • Limited to high net worth investors
    • Concentrated bets
    • Fees – large
    • Little regulatory oversight
    • Lack of liquidity
    • Lack of transparency
    • Asset allocation is slippery
    • High attrition
    • Can hold riskier assets
    • Significant leverage
  • 32. Estimated Growth of Assets / Net Asset Flow Hedge Fund Industry 1990 – Q1 2007
  • 33. Some Hedge Fund Strategies
    • Mutual funds are long-only
    • Long/short equity
      • Statistical arbitrage
      • Market neutral
    • Event Driven
    • Global Macro
    • Arbitrage
      • Convertibles arbitrage
      • Relative value
  • 34.  
  • 35. Hedge Funds
    • Near collapse of Long-Term Capital Management
      • $3.6 billion bailout
      • Precipitated SEC scrutiny of hedge funds
  • 36. Regulation of Hedge Funds
    • Generally unregulated
      • Exemption for less than 100 investors
      • Exemption if accredited
    • Scandals such as Canary Capital Partners
        • Illegal trading with mutual funds
      • Amaranth Advisors, 2006
      • SEC scrutiny
  • 37. Offshore Hedge Funds
    • Major centers include Cayman Islands, Bermuda, Dublin, Luxembourg.
    • Rules
      • Generally not burdensome
      • Anonymity
      • Tax advantages
  • 38.
    • The following 5 slides* are from:
    • AIMA’s Roadmap To Hedge Funds
    • published November, 2008
    • Alternative Investment Management Association
    • * Also slide # 29
  • 39. Hedge Fund Fee Justification
  • 40.  
  • 41. Returns According to Industry Group (IAMA)
  • 42.  
  • 43.  
  • 44. Pertinent Websites
    • Moneycentral.com
    • Federal Reserve www.federalreserve.gov
    • Fidelity Investments www.fidelity.com
    • Investment Company Institute www.ici.org
    • Morningstar, Inc. www.morningstar.com
    • NASD: www.nasd.com
    • SEC: www.sec.gov
    • Vanguard www.vanguard.com
    • Etfconnect.com for ETFs & Closed End
    • www.closed-endfunds.com for closed end
    • http://www.hedgefundresearch.com/ hedge funds
    • http://www.aima.org/ hedge funds