Chapter 25 Professional Asset Management

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Chapter 25 Professional Asset Management

  1. 1. Chapter 25 Professional Asset Management <ul><li>Who manages the investment company portfolio and how are its managers compensated? </li></ul><ul><li>How do you compute the net asset value (NAV) for an investment company? </li></ul><ul><li>What is the difference between closed-end and open-end investment companies? </li></ul><ul><li>What is the difference between the NAV and market price for a closed-end fund? </li></ul>
  2. 2. Chapter 25 Professional Asset Management <ul><li>What are load fees, 12b-1 fees, and management fees and how do they influence investment company performance? </li></ul><ul><li>What are the two major means of fund distribution and what has been the trend for each approach? </li></ul>
  3. 3. What is an Investment Company? <ul><li>An investment company invests a pool of funds belonging to many individuals in a portfolio of individual investments such as stocks and bonds </li></ul><ul><li>The total market value of all investments divided by the number of fund shares outstanding is the net asset value (NAV) </li></ul><ul><li>Portfolio management is handled by an investment management company </li></ul>
  4. 4. Closed-End Versus Open-End Investment Companies <ul><li>Closed-end investment company </li></ul><ul><ul><li>Stock trades on secondary market </li></ul></ul><ul><ul><li>Net asset value (NAV) is determined twice daily, but market price determined by supply and demand </li></ul></ul><ul><ul><li>Discounts from NAV can be opportunities </li></ul></ul><ul><li>Closed-end fund index </li></ul><ul><li>Open-end investment companies </li></ul><ul><ul><li>Mutual funds </li></ul></ul><ul><ul><li>Sell and repurchase shares at NAV </li></ul></ul>
  5. 5. Mutual Fund Costs <ul><li>Load versus no-load open-end funds </li></ul><ul><ul><li>Load funds charge sales commission up to 8.5% of NAV, but usually not a redemption fee </li></ul></ul><ul><ul><li>No-load imposes no initial sales charge, so it sells shares at NAV, but may charge a small redemption fee of 1/2% </li></ul></ul><ul><ul><li>Low-load imposes a front-end sales charge in the 3% range </li></ul></ul>
  6. 6. Mutual Fund Costs <ul><li>Contingent deferred sales loads, or redemption charges, or “rear-end loads”, decline over time </li></ul><ul><li>Annual 12b-1 fee </li></ul><ul><li>Details about funds charges are found in the fund’s prospectus </li></ul><ul><li>Fund management fees </li></ul><ul><li>Portfolio turnover </li></ul><ul><li>Expense ratios </li></ul>
  7. 7. Types of Investment Companies Based on Portfolio Objectives <ul><li>Common stock funds </li></ul><ul><li>Balanced funds </li></ul><ul><li>Taxable bond funds </li></ul><ul><li>Municipal bond funds </li></ul><ul><li>Money market funds </li></ul>
  8. 8. Categories of Stock Funds Based on Investment Objectives <ul><li>Maximum Capital Gain (MCG) </li></ul><ul><li>Aggressive Growth (AG) </li></ul><ul><li>Growth (G) </li></ul><ul><li>Growth-Income (GI) </li></ul><ul><li>Income (I) </li></ul>
  9. 9. Global Investment Companies <ul><li>Foreign funds </li></ul><ul><ul><li>International funds </li></ul></ul><ul><ul><li>Global funds </li></ul></ul><ul><li>Fund categories </li></ul><ul><ul><li>Regions </li></ul></ul><ul><ul><li>Countries </li></ul></ul>
  10. 10. Exchange-Traded Funds (ETFs) <ul><li>ETFs bundle together the securities that are in an index </li></ul><ul><li>A fund that tracks an index, but can be traded like a stock </li></ul><ul><li>Because ETFs are traded on exchanges, they can be traded at any time during the day (unlike mutual funds) </li></ul><ul><li>Their price will fluctuate from moment to moment, just like any other stock's price </li></ul><ul><li>ETFs are more tax-efficient than normal mutual funds, and since they track indexes they have very low operating and transaction costs associated with them </li></ul><ul><li>Examples include DIAMONDS Trust Series I (DIA), Nasdaq-100 Index Tracking Stock (QQQ), and SPDR Trust Series I (SPY) </li></ul>

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