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Copyright 2014 Diane Scott Docking1 Mutual Funds.

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1 Copyright 2014 Diane Scott Docking1 Mutual Funds

2 Copyright 2014 by Diane Scott Docking2 Learning Objectives Understand the different types of mutual funds Understand what is contained in a mutual fund prospectus Calculate the net asset value of and the return on a mutual fund investment Identify the main regulators of mutual funds

3 Copyright 2014 Diane Scott Docking3 Mutual Funds (aka: Investment fund) Gathers funds from savers for investment in capital and money market instruments or investment in specialized assets, such as real estate. Open-end mutual fund Closed-end mutual fund Money market mutual funds Exchange-traded funds (ETFs) Hedge funds Real estate investment trusts (REITs)

4 Copyright 2014 Diane Scott Docking4 Background on Mutual Funds PROs: 1. Offer diversification for the small investor. 2. Represents partial ownership When you buy into a fund, you own a ________ of that fund. You accrue dividends, interest, capital gains and capital losses. 3. Reduces cost of transacting business As opposed to investor doing it all himself 4. Professional management 5. Payment services/check writing capabilities CONs: 1. You accrue dividends, interest, capital gains and capital losses. 2. No federal insurance with mutual fund shares 3. You may have to pay the tax on gains even if you don’t withdraw the funds

5 Copyright 2014 Diane Scott Docking5 Taxation of Mutual Funds 1. Mutual fund itself is tax exempt IF fund distributes ___ percent of its taxable income 2. Distributions of income are taxable at the _______ level, not the fund level. Ordinary income tax on interest and dividends Capital gains tax on capital gains distributions Long-term & short-term capital gains Pay the tax even if don’t withdraw the funds (vs. annuities: not taxable unless withdrawn)

6 Copyright 2014 by Diane Scott Docking6 Mutual Fund Prospectus-Disclosure Requirements Funds must register and provide a prospectus to investors (SEC Form 485 or 497K) Prospectus information includes: 1. Date of issue 2. The minimum amount of investment required 3. The investment objective or goal of the fund 4. Strategies to meet investment objective 5. Principal risks 6. Bar Chart of annual total return in each of the last 10 years or life of fund, whichever is less. 7. Table of the returns on the fund before and after taxes over the past year, the past five years and the past ten years (or life of fund if less); and returns on a comparison index. 8. Table of Fees and Expenses 9. An Example of actual cost 10. Fund manager’s name and length of employment in that position 11. Services the fund offers Check writing Telephone or Internet funds transfer

7 Example: Franklin Templeton Moderate Allocation Fund Copyright 2014 by Diane Scott Docking7 Front page of Prospectus

8 Example: Franklin Templeton Moderate Allocation Fund 1. Date of issue 2. The minimum amount of investment required 1. May 1, Purchase and Sale of Fund Shares: For Class A and C, the minimum initial purchase for most accounts is $1,000 (or $50 under an automatic investment plan). Class R6 and Advisor Class are only available to certain qualified investors and the minimum initial investment will vary depending on the type of qualified investor, as described under "Your Account — Choosing a Share Class — Qualified Investors — Class R6" and "— Advisor Class" in the Fund's prospectus. Copyright 2014 by Diane Scott Docking 8 Prospectus can be found at:

9 Example: Franklin Templeton Moderate Allocation Fund 3. The investment objective or goal of the fund 3. Investment Goal The highest level of long-term total return that is consistent with an acceptable level of risk. Copyright 2014 by Diane Scott Docking 9

10 Example: Franklin Templeton Moderate Allocation Fund 4. Strategies to meet investment objective 4. Principal Investment Strategies The Fund is a "fund of funds" meaning that it seeks to achieve its investment goal by investing its assets in other mutual funds, predominately other Franklin Templeton mutual funds (underlying funds).... investment manager allocates the Fund’s assets among the broad asset classes of equity and fixed-income investments... 55% equity funds; and 45% fixed-income funds... When selecting equity funds, the investment manager considers the underlying funds’ foreign and domestic exposure, market capitalization ranges, and investment style (growth vs. value). When selecting fixed-income funds, the investment manager focuses primarily on maximizing income, appropriate to the Fund’s risk profile and considers the duration and maturity of the underlying funds' portfolios. In evaluating the risk level of the underlying funds, the investment manager analyzes such factors as: (a) relative and absolute performance, including correlations with other underlying funds as well as corresponding benchmarks, and (b) their volatility (the variability of returns from one period to the next).... No more than 25% of the Fund’s assets may be invested in any one underlying fund, except that the Fund may invest up to 50% of its total assets in Franklin U.S. Government Securities Fund. Copyright 2014 by Diane Scott Docking 10

11 Example: Franklin Templeton Moderate Allocation Fund 5. Principal Risks You could lose money by investing in the Fund. Mutual fund shares are not deposits or obligations of, or guaranteed or endorsed by, any bank, and are not insured by the Federal Deposit Insurance Corporation, the Federal Reserve Board, or any other agency of the U.S. government.... There is the possibility that the investment manager’s evaluations and assumptions regarding asset classes and underlying funds will not successfully achieve the Fund's investment goal in view of actual market trends.... The market values of securities owned by the Fund will go up or down, sometimes rapidly or unpredictably.... Stock prices tend to go up and down more dramatically than those of debt securities. A slower-growth or recessionary economic environment could have an adverse effect on the prices of the various stocks held by the Fund.... Securities issued by smaller and midsize companies may be more volatile in price than those of larger companies, involve substantial risks and should be considered speculative... Investing in foreign securities typically involves more risks than investing in U.S. securities... When interest rates rise, debt security prices generally fall.... The Fund is subject to management risk because it is an actively managed investment portfolio. The Fund's investment manager applies investment techniques and risk analyses in making investment decisions for the Fund, but there can be no guarantee that these decisions will produce the desired results. Copyright 2014 by Diane Scott Docking 11

12 Example: Franklin Templeton Moderate Allocation Fund 6. Bar Chart of annual total return in each of the last 10 years or life of fund, whichever is less 6. Copyright 2014 by Diane Scott Docking 12

13 Example: Franklin Templeton Moderate Allocation Fund 7. Table of the returns on the fund before and after taxes over the past year, the past five years and the past ten years (or life of fund if less); and returns on a comparison index. 7. Copyright 2014 by Diane Scott Docking 13

14 Example: Franklin Templeton Moderate Allocation Fund 8. Table of Fees and Expenses 8. Copyright 2014 by Diane Scott Docking 14

15 Example: Franklin Templeton Moderate Allocation Fund 8. Table of Fees and Expenses (cont.) 8. Copyright 2014 by Diane Scott Docking 15

16 Example: Franklin Templeton Moderate Allocation Fund 9. An Example of actual cost 9. Copyright 2014 by Diane Scott Docking 16

17 Example: Franklin Templeton Moderate Allocation Fund 10. Fund manager’s name and length of employment in that position 10. Portfolio Managers: T. ANTHONY COFFEY, CFA Vice President of Advisers and portfolio manager of the Fund since THOMAS A. NELSON, CFA Portfolio Manager of Advisers and portfolio manager of the Fund since Copyright 2014 by Diane Scott Docking 17

18 Example: Franklin Templeton Moderate Allocation Fund 11. Services the Fund offers 11. You may purchase or redeem shares of the Fund on any business day online through our website at franklintempleton.com, by mail (Franklin Templeton Investor Services, P.O. Box , Sacramento, CA ), or by telephone at (800) Copyright 2014 by Diane Scott Docking 18

19 Example: American Century Investments Legacy Multi Cap Fund Copyright 2014 by Diane Scott Docking19 Front page of Prospectus

20 Example: American Century Investments Legacy Multi Cap Fund 1. Date of issue 2. The minimum amount of investment required 1. December 31, Purchase and Sale of Fund Shares: Unless otherwise specified below, the minimum initial investment amount to open an account is $2,500 ($2,000 for Coverdell Education Savings Accounts). Investors opening accounts through financial intermediaries may open an account with $250 for all classes except the Institutional Class, but the financial intermediaries may require their clients to meet different investment minimums. Copyright 2014 by Diane Scott Docking 20 Prospectus can be found at: https://www.sec.gov/Archives/edgar/data/ / /acgf c_497k.htm https://www.sec.gov/Archives/edgar/data/ / /acgf c_497k.htm

21 Example: American Century Investments Legacy Multi Cap Fund 3. The investment objective or goal of the fund 3. Investment Objective The fund seeks long-term capital growth. Copyright 2014 by Diane Scott Docking 21

22 Example: American Century Investments Legacy Multi Cap Fund 4. Strategies to meet investment objective 4. Principal Investment Strategies  The fund uses a quantitative investment process designed to identify common stocks of companies that currently have, or are expected to have, earnings and revenues that are not only growing, but growing at an accelerating rate, and that also have strong price momentum. This process is based on a proprietary multi- factor model that scores the securities in the fund’s investment universe. The portfolio managers then select from among the highest scored securities when making purchase decisions for the fund. These securities may be categorized as “growth” or “value” stocks and may be selected regardless of their weighting in any index or other benchmark and regardless of geographic location. The securities become candidates for sale as their rankings fall.  The fund will invest in small-, medium- and large capitalization stocks as defined by Lipper, with approximately 25% to 50% of assets invested in each category during normal market conditions. Copyright 2014 by Diane Scott Docking 22

23 Example: American Century Investments Legacy Multi Cap Fund 5. Principal Risks Copyright 2014 by Diane Scott Docking 23

24 Example: American Century Investments Legacy Multi Cap Fund 6. Bar Chart of annual total return in each of the last 10 years or life of fund, whichever is less 6. Copyright 2014 by Diane Scott Docking 24

25 Example: American Century Investments Legacy Multi Cap Fund 7. Table of the returns on the fund before and after taxes over the past year, the past five years and the past ten years (or life of fund if less); and returns on a comparison index. 7. Copyright 2014 by Diane Scott Docking 25

26 Example: American Century Investments Legacy Multi Cap Fund 8. Table of Fees and Expenses 8. Copyright 2014 by Diane Scott Docking 26

27 Example: American Century Investments Legacy Multi Cap Fund 9. An Example of actual cost 9. Copyright 2014 by Diane Scott Docking 27

28 Example: American Century Investments Legacy Multi Cap Fund 10. Fund manager’s name and length of employment in that position 10. Portfolio Managers John T. Small Jr., Vice President and Portfolio Manager, has been a member of the team that manages the fund since Stephen Pool, Portfolio Manager, has been a member of the team that manages the fund since Copyright 2014 by Diane Scott Docking 28

29 Example: American Century Investments Legacy Multi Cap Fund 11. Services the Fund offers 11. You may purchase or redeem shares of the fund on any business day through our website at americancentury.com, in person (at one of our Investor Centers), by mail (American Century Investments, P.O. Box , Kansas City, MO ), by telephone at (Investor Services Representative) or (Business, Not-For- Profit and Employer-Sponsored Retirement Plans), or through a financial intermediary. Shares may be purchased and redemption proceeds received by electronic bank transfer, by check or by wire. Copyright 2014 by Diane Scott Docking 29

30 Copyright 2014 Diane Scott Docking30 Family of Mutual Funds Family of funds offered by investment companies Group of different funds with a variety of investment objectives managed by an investment advisory company. Investor able to allocate then transfer funds among funds Funds may be switched from fund to fund at nominal charges Economic Benefits: Flexibility Lower costs Wider Choices

31 Copyright 2014 by Diane Scott Docking31 Example: American Century Family of Mutual Funds Different types of Mutual Fund Investment Categories

32 Copyright 2014 Diane Scott Docking32 Types of Investment Fund Categories  Growth and income funds  Growth funds  Aggressive growth funds  Balanced funds  Income funds  Specialty funds: o Global o Tax-exempt o Sector

33 Copyright 2014 Diane Scott Docking33 Types of Investment Funds  Growth & Income Funds o Seek balance between capital gains and current income. o Mostly invest in highly rated companies’ stock. o Ideal for investors who are looking for some income, but would also want to invest in growth stocks.  Growth Funds o Seek to invest in industries and companies that are not mature and are still experiencing sizable growth. o Focus is on capital appreciation rather than steady income. o Investors looking for a higher return and a moderate risk. Investors’ outlook needs to be long-term.

34 Copyright 2014 Diane Scott Docking34 Types of Investment Funds  Aggressive Growth Funds o Similar to growth funds in their outlook, but are more risky because they focus on emerging industries and unproven firms. o Investors trade off a very high return potential for high risk.  Balanced Funds o A hybrid portfolio of growth stocks and fixed-income securities. o The proportion of each determines the level of return for each fund. o Generates higher proportion of income than growth and income funds and are less volatile. o Investors who have a few more years to retirement and are typically in their early 50s are attracted to such funds.

35 Copyright 2014 Diane Scott Docking35 Types of Investment Funds  Income Funds o Consist of bonds that provide steady coupon cash flows and are quite varied in their risk level. Corporate bond funds (risky) Treasury bond funds (no default risk) Mortgage-backed securities funds (moderate risk) o Funds are exposed to default risk and interest rate risk. o Attractive to investors close to retirement age as the income stream of fund’s instruments provides them with necessary income.

36 Copyright 2014 Diane Scott Docking36 Stock/Equity Mutual Fund Categories International and Global funds Invest in foreign securities Returns affected by stock prices Returns also affected by foreign exchange rates A global mutual fund invests in some U.S. stocks Index funds Designed to simply match the performance of an existing stock index S&P 500 Index Russell 2000 Index

37 Copyright 2014 by Diane Scott Docking37 Stock/Equity Mutual Fund Categories Specialty funds focus on a group of companies sharing a particular characteristic Internet funds focus on investments in Internet companies Multifund funds or (Fund of Funds) invest in a portfolio of different mutual funds More diversified Involves higher expenses

38 Copyright 2014 Diane Scott Docking38 Fees & Expenses of Mutual Funds Shareholder Fees: 1. Sales Loads Compensates the broker selling the fund May not exceed 8.5% (FINRA) 2. Redemption Fee Charged when shareholder redeem their shares Not a sales load. Used to defray fund costs associated with redemption. Paid to the fund, not a broker. May not exceed 2% (SEC) 3. Purchase Fee Charged when shareholder purchases their shares Not a sales load. Used to defray fund costs associated with purchase. Paid to the fund, not a broker. 4. Exchange Fee Charged when shareholder transfers monies between funds in the same family of funds. 5. Account Fee A charge for maintaining the account. E.g. Fee if account goes below a certain dollar amount Fees are to cover management costs which are typically around 1% of total assets per year

39 Copyright 2014 by Diane Scott Docking39 Fees & Expenses of Mutual Funds Annual Operating Expenses: 1. Management Fees Paid from fund to fund’s investment advisor for managing fund 2. 12b-1 Fees Paid from fund to cover: Distribution expenses: printing, mailing, etc. Shareholder service expenses Marketing/Advertising Compensation to sellers of fund  Shareholder service expenses limited to 0.25% of fund’s average net assets per year. (FINRA)  Marketing, distribution and remaining 12b-1 feels limited to 0.75% of fund’s average net assets per year. (FINRA) Active marketing expenses and compensation increases expenses—12b-1 expenses 3. Other Expenses Expenses not included in Management Fees and 12b-1 Fees: Custodial expenses, legal expenses, accounting expenses, transfer agent expense, and other administrative expenses

40 Copyright 2014 by Diane Scott Docking40 Fees & Expenses of Mutual Funds  Total Annual Fund Operating Expenses o Expressed as a % of average net assets Expense ratio = Total annual expenses/fund NAV Passed on to investors since NAV is reduced by fees Investor should compare expense ratios

41 Copyright 2014 Diane Scott Docking41 Open-End Funds Best known and most widely held Number of shares not fixed Continually offer and redeem shares to accommodate demand at the offer (NAV) price Willing to repurchase investor shares at any time Number of shares outstanding does not remain constant NAV determined by fund daily Two sources for open-ended mutual fund listings : National Association of Securities Dealers (NASD) through NASDAQ supply NAV, offer price and net change Lipper Analytical Services, Inc. provide cost and performance data

42 Copyright 2014 Diane Scott Docking42 Net Asset Value calculation Net asset value (NAV) the per share value of the fund. You buy into the fund or sell out of the fund at its NAV. – where MVA = market value of fund's assets, LIAB = dollar amount of fund's liabilities, and NSO = number of shares outstanding

43 Copyright 2014 by Diane Scott Docking43 Example: Net Asset Value calculation Superb Growth mutual fund contains the following assets as of end of day May 1, 2014: The mutual fund has no liabilities and 15,000 shares outstanding held by investors. 1) What is the fund’s NAV at days end May 1, 2014? 2) If tomorrow Sear’s shares increase to $45, Exxon to $48, and AT&T to $50, what is the new NAV assuming outstanding shares remain the same Stock NameSharesPrice/sh.Market Value Sears1,000$37.75$37,750 Exxon2,000$43.70$87,400 AT&T1,500$46.67$70,005 MVA =$195,155

44 Copyright 2014 by Diane Scott Docking44 Example: Net Asset Value calculation 1) What is the fund’s NAV at days end May 1, 2014? Stock NameSharesPrice/sh.Market Value Sears1,000$37.75$37,750 Exxon2,000$43.70$87,400 AT&T1,500$46.67$70,005 MVA =$195,155

45 Copyright 2014 by Diane Scott Docking45 Example: Net Asset Value calculation 2) If tomorrow Sear’s shares increase to $45, Exxon to $48, and AT&T to $50, what is the new NAV assuming outstanding shares remain the same? The NAV at days end May 2, 2014 is: Stock NameSharesPrice/sh.Market Value Sears1,000$45.00$45,000 Exxon2,000$48.00$96,000 AT&T1,500$50.00$75,000 MVA =$216,000

46 Mutual Fund Quote NETYTD3-YR FUNDNAVCHG%RET%RET American Century Inv Balanced Growth Value COMPANY Fund families in bold face FUND NAME NET ASSET VALUE Per-share value calculated by the fund NET ASSET VALUE CHANGE Gain or loss, based on prior day’s NAV TOTAL RETURN NAV change plus accumulated income for the period, in percent. Assumes reinvestment of all distributions and after subtracting annual expenses. Figures don’t reflect loads or redemption fees. Percentages are annualized for periods exceeding one year. 46Copyright 2014 Diane Scott Docking

47 47 Closed-End Funds Raise capital through public offerings of a fixed number of shares After initial offering they trade on secondary market Mutual fund does not repurchase the shares they sell—similar to direct common stock investment Investors must sell shares on an exchange Number of outstanding shares is constant Value of shares related to expectations of portfolio and determined in market. Market price of shares determined by supply and demand for the shares Sell at a premium or discount of NAV Usually 10% - 20% discount of NAV Discounts could be due to a variety of reasons including poor management, tax considerations, and market demand. Market price and NAV are almost never the same.

48 Copyright 2014 by Diane Scott Docking48 Example: Price calculation Closed-End fund Shutter Growth mutual fund is closed-end mutual fund with the following assets as of end of day May 1, 2014: The mutual fund has no liabilities and 10,000 shares outstanding held by investors. 1) What is the fund’s NAV at days end May 1, 2014? 2) Suppose the fund is trading at a discount of 8%. What is the share price? 3) Suppose the fund is trading at a premium of 10% What is the share price? Stock NameSharesPrice/sh.Market Value Sears1,000$37.75$37,750 Exxon2,000$43.70$87,400 AT&T1,500$46.67$70,005 MVA =$195,155

49 Copyright 2014 by Diane Scott Docking49 Example: Price calculation Closed-End fund 1) What is the fund’s NAV at days end May 1, 2014? Stock NameSharesPrice/sh.Market Value Sears1,000$37.75$37,750 Exxon2,000$43.70$87,400 AT&T1,500$46.67$70,005 MVA =$195,155

50 Copyright 2014 by Diane Scott Docking50 Example: Price calculation Closed-End fund 2) Suppose the fund is trading at a discount of 8%. What is the share price? Price = NAV (1-Discount) Price = $19.52 (1-.08) = $19.52 (.92) = $ ) Suppose the fund is trading at a premium of 10%. What is the share price? Price = NAV (1+ Premium) Price = $19.52 (1.10) = $21.47

51 Closed-End Fund Quote 52 WK NET VOL PREM TTL FUND(SYM) EXCH NAV CLOSE CHG 100s /DISC DIST RET General Equity Funds BlueChipVal BLU N High Yield Bond Funds CpHiYld V HYV N COMPANY Fund families in bold face FUND NAME Fund name and ticker symbol DIVIDEND/DISTRIBUTION Annual dividend/distribution payment per share EXCHANGE N – NYSE; A – AMEX, etc. CLOSE Closing market price per share VOLUME Shares traded in hundreds NET PRICE CHANGE Gain or loss, based on prior day’s closing price PREMIUM/DISCOUNT NAV(1+prem/disc) = close NET ASSET VALUE Per-share value calculated by the fund 52 WEEK TOTAL RETURN 12 month yield is computed by dividing income dividends paid (during the previous twelve months or fifty-two weeks) by the latest month-end market price adjusted for capital gains distributions. 51Copyright 2014 Diane Scott Docking

52 52 Load versus No-Load Mutual Funds Classification refers to whether or not there is a sales charge No-load funds funds that charge no commission fees funds are promoted, bought and sold directly via the mutual fund Load funds promoted by registered representatives of brokerage firms who get a commission funds charge a sales commission at the time of entry (up to 8.5%) and/or an exit fee at the time of exit Front-end load, Back-end load, Level load

53 Copyright 2014 by Diane Scott Docking53 Load Formula The formula for calculating a load charge is: The $Cost/share = NAV + $LOAD

54 Copyright 2014 by Diane Scott Docking54 Example: Calculating the Load Freddy Fund is an open-end fund. Current NAV is $20. The fund charges an 8.5% front-end load to purchase a share. 1) What is the cost/share to buy into the fund? 2) If Mary has $10,000, how many shares of Freddy Fund can she purchase?

55 Copyright 2014 by Diane Scott Docking55 Example: Calculating the Load 1) What is the cost/share to buy into the fund? Cost/share = NAV + $LOAD = $20 + $1.86 = $21.86 Check:

56 Copyright 2014 by Diane Scott Docking56 Example: Calculating the Load 2) If Mary has $10,000, how many shares of Freddy Fund can she purchase? $10,000/cost per share = number of shares $10,000/$21.86 = ≈ 457 shares OR $10,000 x (1-Load%) = Amount available to invest/NAV = number of shares $10,000 x (1-.085) = $9,150/$20 = ≈ 457 shares

57 Copyright 2014 Diane Scott Docking57 Money-Market Mutual Fund Money-Market Mutual Fund An open-ended fund Investments limited to short-term instruments: CDs, commercial paper, and T-bills, etc.  Provide excellent liquidity for investors.  Compete with bank deposits. MMMFs offer transactional conveniences: Check writing privileges, Number of checks per month may be restricted debit cards, wire transfers, sweep features, shareholders get periodic statements

58 Copyright 2014 Diane Scott Docking58 MMMFs vs. MMDAs  When market rates were above Regulation Q maximum deposit rates, MMMFs grew rapidly.  Banks were able to compete after the 1982 Depository Institutions Act when they were permitted to offer insured, Money Market Deposit Accounts (MMDA).

59 Copyright 2014 Diane Scott Docking59 Composition of Money Market Fund Assets U.S. Treasury Securities $91 billion 6% Other $303 billion 20% Commercial Paper $620 billion 41% CDs $123 billion 8% Repurchase Agreements $186 billion 12% Other U.S. Securities $189 billion 13%

60 Money Market Mutual Fund Quote AVG.7 DAY FUNDMAT.YIELDASSETS US Treas Tr Question: What is the cost to buy 1 share of this mutual fund? Answer: $1 FUND NAMEAVERAGE MATURITY In days 7-DAY YIELD (percent) TOTAL ASSETS In millions of dollars 60Copyright 2014 by Diane Scott Docking

61 61 MMMF Earnings Formula  Does not take compounding into effect.

62 Copyright 2014 by Diane Scott Docking62 Example: MMMF Earnings Calculation Ruthie has $1,000 invested in a MMMF for 30 days at a 7-day yield of 5%. How much interest will she receive in 30-days? = ($1000 x.05 ) / 365 ~= $0.137 per day. Multiply by 30 days to yield $4.11 in interest.

63 Copyright 2014 by Diane Scott Docking63 Exchange Traded Funds  First introduced in 1989 at Toronto Stock Exchange  Shares traded on organized exchanges (NYSE) like closed- end funds Usually replicate an index Some popular ETFs: SPDR (Spiders) S&P’s Depository Receipts (SPY) tracks the S&P 500 S&P’s Depository Receipts (MDY) tracks the S&P MidCap 400 Diamonds (DIA) - tracks the DJIA Vipers (VTI) - tracks the Vanguard Large-Cap stocks.

64 ETF Quote (per WSJ May 6, 2014) YTD52 WEEKS YLD VOL NET %CHGHILO STOCK (SYM) DIV % 100s CLOSE CHG Diamond DIA SPDR SPY CLOSE Closing market price per share DIVIDEND YIELD Annual dividend payment divided by current price per share DIVIDEND Annual dividend payment per share YTD % PRICE CHANGE % change in price since beginning of year NET PRICE CHANGE Gain or loss, based on prior day’s closing price 52 WEEK HI & LO Highest and lowest closing price of fund over last 52 weeks FUND NAME Fund name and ticker symbol VOLUME Shares traded in hundreds 64Copyright 2014 by Diane Scott Docking

65 65 Real Estate Investment Trusts (REIT) A closed-end mutual fund that invests in real estate or mortgages Classifications Equity REIT Mortgage REIT Hybrid of the two Sometimes seen as an inflation hedge Performance influenced by interest rates and area real estate performance

66 Copyright 2014 Diane Scott Docking66 Hedge Funds  Goal is to provide consistent, above-market returns while reducing the risk of loss.  They do this by: o Comprising investment pools that use a combination of market philosophies and analytical techniques. o Seeking to develop financial models to identify, evaluate, and execute trading decisions. Investing in derivatives, selling stock short, and combine borrowing to magnify returns  Are private, unregistered investment pools: o Open to a limited number of accredited investors. o Typically organized as limited partnerships. o Historically unregulated

67 Copyright 2014 Diane Scott Docking67 Federal Regulation of Funds Securities Acts of 1933 and 1934 requires that funds provide full information to investors via a prospectus 1933 – deals with issuance of new securities 1934 – deals with the trading of securities after issuance

68 Copyright 2014 Diane Scott Docking68 Federal Regulation of Funds (cont.) Investment Company Act of 1940 sets the standards by which mutual funds operate: promotion/advertising, reporting requirements, pricing of securities, and the allocation of investments within a fund's portfolio, etc. contains restrictions to prevent conflicts of interest between investors and mangers Fund must register with SEC if > ____ shareholders Registration statement and prospectus of mutual funds must state its specific investment objectives Can not change focus of fund without shareholder approval

69 Copyright 2014 Diane Scott Docking69 Federal Regulation of Funds (cont.) Investment Advisors Act of 1940 rules governing investment advisors Insider Trading and Securities Fraud Enforcement Act of 1988 designed to discourage and punish insider trading in securities and securities fraud. authorizes the SEC to award bounties to individuals who provide insider trading information.

70 Copyright 2014 by Diane Scott Docking70 NO NO Insider Trading

71 Copyright 2014 Diane Scott Docking71 Federal Regulation of Funds (cont.)  Mutual Funds Integrity & Fee Transparency Act of 2003 o Requires an Open-end mutual fund to disclose costs in its periodic reports to shareholders, including: the operating expenses for each $1,000 of investment in the company that are borne by shareholders; the structure of the fund manager’s compensation and their ownership interest in the securities of the fund; the portfolio turnover rates, so as to facilitate comparison among mutual funds, and a description of the implications of a high turnover rate for portfolio transaction costs and performance; the practices regarding payment of commissions for effecting securities transactions, sales, and distribution of the company's shares; the disclosure of whether brokers received extra financial incentives to sell a particular fund or class of shares; and information concerning discounts on front-end sales loads for which investors may be eligible, including the minimum purchase amounts required for such discounts. o Disallows “late-trading”

72 Copyright 2014 Diane Scott Docking72 Federal Regulation of Funds (cont.)  Mutual Fund Reform Act of 2004 o Intent was to “simplify” and “standardize” the MFI&FTA 2003 by: Standardizing the computation and disclosure of (i) fund expenses and (ii) transaction costs, which yield a total investment cost ratio, and tell investors actual dollar costs; Requiring disclosure and definitions of all types of costs; Disclosing portfolio managers’ compensation and stake in fund; Disclosing broker compensation at the point of sale; Disclosing and explaining portfolio turnover ratios to investors; Disclosing proxy voting policies and record

73 Copyright 2014 Diane Scott Docking73 Federal Regulation of Funds (cont.)  Mutual Fund Reform Act of 2004 (cont.) Every 6 months investors to receive report of fund’s annual fees and expenses. Reporting fund returns on after-tax basis Greater consistency between fund practices and investment objective Disclosure of portfolio practices Requiring fund managers to list their security holdings more frequently Title 17 in Code of Federal Regulations Title 17 in Code of Federal Regulations


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