Lecture Presentation Software to accompany

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Lecture Presentation Software to accompany

  1. 1. Lecture Presentation Software to accompany Investment Analysis and Portfolio Management Seventh Edition by Frank K. Reilly & Keith C. Brown Chapter 25
  2. 2. The Asset Management Industry: Structure and Evolution <ul><li>Contract directly with a management and advisory firm </li></ul><ul><ul><li>relationship with client </li></ul></ul><ul><ul><li>assets under management (AUM) </li></ul></ul><ul><ul><li>separate accounts </li></ul></ul><ul><ul><li>customized </li></ul></ul><ul><li>Commingling of investment capital of several clients in an investment company </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. 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>
  9. 9. Sources of Information About Mutual Funds <ul><li>The Wall Street Journal </li></ul><ul><li>Barron’s - weekly and quarterly </li></ul><ul><li>Investment Companies </li></ul><ul><li>Mutual Funds Update </li></ul><ul><li>Mutual Funds Report </li></ul><ul><li>Closed-end Weekly Review </li></ul><ul><li>FundEdge </li></ul><ul><li>Management Results </li></ul><ul><li>Forbes </li></ul><ul><li>Business Week - “Mutual Fund Scoreboard” </li></ul><ul><li>Morningstar Mutual Funds </li></ul><ul><li>Value Line </li></ul>
  10. 10. Ethics and Regulation in the Professional Asset Management Industry <ul><li>Agency - looking out for the interest of another </li></ul><ul><li>Asset management industry is based on handling someone else’s money </li></ul><ul><li>The asset management industry is heavily regulated to ensure a minimum level of acceptable practice </li></ul><ul><li>Investment Company Act of 1940 </li></ul><ul><li>Securities Act of 1933 </li></ul><ul><li>Securities Act of 1934 </li></ul><ul><li>Investment Advisors Act of 1940 </li></ul><ul><li>ERISA (1974) - Prudent man statute </li></ul>
  11. 11. Ethics and Regulation in the Professional Asset Management Industry <ul><li>Association for Investment Management and Research (AIMR) has a Code of Ethics and Standards of Professional Conduct </li></ul><ul><li>Chartered Financial Analysts (CFAs) are expected to uphold the ethical standards of AIMR </li></ul><ul><li>Compensation dilemma - incentives and risk </li></ul><ul><li>Soft dollars </li></ul>
  12. 12. Performance of Investment Companies <ul><li>Below average returns for actively managed equity and bond funds </li></ul><ul><li>Do a fund’s objectives matter? </li></ul><ul><ul><li>Positive relationship between stated objectives and risk measures </li></ul></ul><ul><li>Do managers generally outperform the market? </li></ul><ul><ul><li>Results are more consistent in shorter time periods </li></ul></ul>
  13. 13. Your Portfolio Manager <ul><li>1. Determine your risk-return preferences and develop a portfolio that is consistent with them </li></ul><ul><li>2. Diversify your portfolio to eliminate unsystematic risk </li></ul><ul><li>3. Maintain your portfolio diversification and your desired risk class while allowing flexibility so you could shift between alternative investment instruments as desired </li></ul><ul><li>4. Attempt to achieve a risk-adjusted performance that is superior to aggregate market performance </li></ul><ul><li>5. Administer the account, keep records of costs, provide timely information for tax purposes, and reinvest dividends if desired </li></ul>

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