I nvestment A nalysis II 3 Alternative Asset Classes Investment Funds Investment funds are intermediaries that invest investor pooled funds for a fee. The investor usually receives a share of the fund proportional to his/her investment. Investment funds are either managed or unmanaged. Unmanaged funds are also called Unit Investment Trusts and hold a fixed portfolio for the life of the trust and is often tax exempt. Unmanaged funds are usually ready to redeem investors’ shares immediately at market value. Managed funds are in turn classified in terms of their readiness to redeem investors’ funds. Open-end funds (Mutual Funds) do redeem at request Closed-end funds do not. Instead they issue shares that are then traded on secondary markets
I nvestment A nalysis II Alternative Asset Classes Investment Funds Valuation The basic valuation metric is Net Asset Value (NAV), the per share value of the investment company’s assets minus its liabilities. The most significant liability comes from fees owed to investment managers (if any). For unmanaged and open-end investment funds, the share value is the NAV as they stand ready to redeem at market value. For closed-end funds, the share price is determined in a secondary market and may be at a premium to the NAV or at a discount to it. Fees are usually calculated as a % and are either one-time or periodic (e.g. annual). One- time fees may be front-end loaded (a % of purchase) or back-end loaded (a % of value at exit). Back-end charges may be declining (reduce as you stay in the fund)
I nvestment A nalysis II Alternative Asset Classes Investment Funds Exchange Traded Funds (ETF) ETFs advantages (cont’d): For many – if not most – ETFs, there exists futures and options contracts on the same index. ETF portfolios are published on a daily basis whereas other funds are only published quarterly at best. ETFs are cost efficient. You can buy exposure with one transaction that otherwise would require establishing an entire portfolio wit many individual transaction fees ETFs are cost effective. There are no load fees, and the expense ratio can be held low as there is no shareholder accounting at the account level. Dividends are reinvested immediately whereas for mutual funds timing of reinvestment varies.
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