Chapter 5


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Chapter 5

  1. 1. 5 Chapter The Financial Services Industry: Mutual Funds
  2. 2. Overview <ul><li>In this segment ... Mutual Funds: </li></ul><ul><ul><li>Activities of mutual funds </li></ul></ul><ul><ul><li>Size, structure and composition </li></ul></ul><ul><ul><li>Balance sheets and recent trends </li></ul></ul><ul><ul><li>Regulation of mutual funds </li></ul></ul><ul><ul><li>Global issues </li></ul></ul><ul><ul><li>Hedge funds* </li></ul></ul>
  3. 3. Mutual Funds <ul><li>Open-ended </li></ul><ul><li>Closed-end </li></ul><ul><li>End of 2000: </li></ul><ul><ul><li>More than 7,100 stock and bonds mutual companies. </li></ul></ul><ul><ul><li>Total assets of $5.12 trillion. </li></ul></ul><ul><ul><li>8,200 firms and $6.97 trillion if money market mutual funds included </li></ul></ul>
  4. 4. Size, structure and composition <ul><ul><li>First mutual fund: Boston, 1924. </li></ul></ul><ul><ul><li>Slow growth, initially. </li></ul></ul><ul><ul><li>Advent of money market mutual funds, 1972. </li></ul></ul><ul><ul><ul><li>Regulation Q. </li></ul></ul></ul><ul><ul><li>Total assets in stock and bond mutual funds: </li></ul></ul><ul><ul><ul><li>1940: $0.4 billion. </li></ul></ul></ul><ul><ul><ul><li>1990: $568.5 billion </li></ul></ul></ul><ul><ul><ul><li>2000: $5,120.0 billion. </li></ul></ul></ul>
  5. 5. Size, Structure and Composition <ul><ul><li>By asset size, mutual fund industry second most important FI group. </li></ul></ul><ul><ul><li>Recent inroads by commercial banks and insurance companies </li></ul></ul><ul><ul><ul><li>Mellon purchase of Dreyfus </li></ul></ul></ul><ul><ul><ul><li>State Farm (9,000 agents) </li></ul></ul></ul>
  6. 6. Types of Mutual Funds <ul><li>Long-term funds (71.0% of assets, 2000) </li></ul><ul><ul><li>Bond and income funds. </li></ul></ul><ul><ul><li>Equity funds. </li></ul></ul><ul><ul><li>Hybrid </li></ul></ul><ul><li>Short-term funds (29.0% of assets, 2000) </li></ul><ul><ul><li>Taxable and tax-exempt MMMFs </li></ul></ul><ul><ul><li>Generally higher returns than bank deposits but uninsured. </li></ul></ul>
  7. 7. Number of Mutual Funds
  8. 8. Overview of Mutual Funds <ul><ul><li>Objectives (and adherence to stated objectives), rates of return and risk characteristics vary. </li></ul></ul><ul><li>Examples: </li></ul><ul><ul><li>Aggressive growth funds </li></ul></ul><ul><ul><li>Growth funds </li></ul></ul><ul><ul><li>Precious metals </li></ul></ul><ul><ul><li>World </li></ul></ul>
  9. 9. Returns to Mutual Funds <ul><ul><li>Income and dividends of underlying portfolio. </li></ul></ul><ul><ul><li>Capital gains on trades by mutual fund management. </li></ul></ul><ul><ul><li>Capital appreciation in values of assets held in the portfolio. </li></ul></ul><ul><ul><ul><li>Marked-to-market. </li></ul></ul></ul><ul><ul><ul><li>Net-asset value (NAV). </li></ul></ul></ul>
  10. 10. Web Resources <ul><li>For information on the performance of mutual funds, visit: </li></ul><ul><li>Morningstar </li></ul>Web Surf
  11. 11. Types of Funds <ul><ul><li>Open-ended funds: contrast with most corporate securities traded on stock exchanges. </li></ul></ul><ul><ul><li>Closed-end investment companies: </li></ul></ul><ul><ul><li>Fixed number of shares </li></ul></ul><ul><ul><ul><li>Example: REITs. </li></ul></ul></ul><ul><ul><ul><li>May trade at premium or discount. </li></ul></ul></ul><ul><ul><li>Load versus no-load funds. </li></ul></ul>
  12. 12. Mutual Fund Costs <ul><li>Two types of fees: </li></ul><ul><ul><li>Sales loads </li></ul></ul><ul><ul><ul><li>Generally, negative effect on performance outweighs benefits </li></ul></ul></ul><ul><ul><li>Fund operating expenses </li></ul></ul><ul><ul><ul><li>Management fee </li></ul></ul></ul><ul><ul><ul><li>12b-1 fees </li></ul></ul></ul>
  13. 13. Mutual Fund Share Quotes <ul><li>Quotes include: </li></ul><ul><ul><li>Fund name, Objective, Minimum investment required, Asset size, Maximum initial and exit sales charges, Annual expenses, NAV, Dividends , Quarterly earnings, </li></ul></ul><ul><ul><li>One-through five-year rating (A through E). </li></ul></ul>
  14. 14. Balance Sheet and Trends <ul><li>Money Market Funds </li></ul><ul><ul><li>Key assets are short-term securities (consistent with deposit-like nature) </li></ul></ul><ul><ul><ul><li>2000: $1,303.9 billion (71.9% of total assets) </li></ul></ul></ul><ul><ul><li>Many have share values fixed at $1 and adjust number of shares owned by the investor. </li></ul></ul>
  15. 15. Balance Sheet and Trends <ul><li>Long-term Funds </li></ul><ul><ul><li>Stocks comprise over 72.8 % of asset portfolios in 2000. </li></ul></ul><ul><ul><li>Shift to U.S. Treasuries, municipal bonds etc. when equity markets not performing as well. </li></ul></ul>
  16. 16. Regulation <ul><ul><li>One of the most closely regulated among non-depository FIs. </li></ul></ul><ul><ul><li>Primary regulator: SEC </li></ul></ul><ul><ul><ul><li>Emphasis on full disclosure and anti-fraud measures to protect small investors. </li></ul></ul></ul><ul><ul><ul><li>NASD supervises mutual fund share distributions. </li></ul></ul></ul>
  17. 17. Legislation <ul><ul><li>Securities Act 1933, 1934 </li></ul></ul><ul><ul><li>Investment Advisers Act, 1940. </li></ul></ul><ul><ul><li>Insider Trading and Securities Fraud Enforcement Act of 1988. </li></ul></ul><ul><ul><li>Market Reform Act of 1990 </li></ul></ul><ul><ul><ul><li>Allows SEC to halt trading and introduce circuit breakers. </li></ul></ul></ul><ul><ul><li>National Securities Markets Improvement Act of 1996. </li></ul></ul><ul><ul><ul><li>Exempts mutual fund sellers from state securities regulatory oversight. </li></ul></ul></ul>
  18. 18. Web Resources <ul><li>For details of regulation of securities firms and investment banks, visit: </li></ul><ul><li>SEC: </li></ul><ul><li>NASD: </li></ul>Web Surf
  19. 19. Global Issues <ul><li>Worldwide growth in mutual fund investment not as great as in the U.S. </li></ul><ul><ul><li>$1,626 trillion in 1992 to $4,833 trillion in 2000 </li></ul></ul><ul><ul><ul><li>200% growth compared to 340% in U.S. </li></ul></ul></ul><ul><ul><li>Larger returns in U.S.stock markets </li></ul></ul><ul><ul><li>Greatest development in countries with most developed markets </li></ul></ul><ul><ul><li>Opportunities from declining Japanese markets </li></ul></ul>
  20. 20. Hedge Funds* <ul><li>Not technically mutual funds </li></ul><ul><ul><li>Not subject to SEC regulation </li></ul></ul><ul><ul><li>Organized as limited partnership </li></ul></ul><ul><ul><li>Common feature is use of leverage </li></ul></ul><ul><li>High returns in 1990s </li></ul><ul><li>Near collapse of Long-Term Capital Management </li></ul><ul><ul><li>$3.6 million bailout </li></ul></ul>