Contemporary Investments: Chapter 4 Chapter 4 MUTUAL FUNDS What is a mutual fund and how do mutual funds operate? How much does mutual fund investing cost? How should mutual fund performance be evaluated? What are the other types of investment companies?

Contemporary Investments: Chapter 4 Understanding mutual funds How a mutual fund operates The continual sale and redemption of shares Net asset value

Contemporary Investments: Chapter 4 Figure 4.1 – Recent Growth in the Assets of Mutual Funds

Contemporary Investments: Chapter 4 Advantages of mutual funds Diversification Smaller minimum investments Professional management Professional managers run the fund

Contemporary Investments: Chapter 4 The average mutual fund hasn’t beaten the market consistently in recent years Growth and development of mutual funds Domestic perspective International perspective

Contemporary Investments: Chapter 4 Types of mutual funds Traditional categories Stock (equity) Bond and Income Money market

Contemporary Investments: Chapter 4 Figure 4.2 – Distribution of Mutual Fund Assets by Type of Fund

Contemporary Investments: Chapter 4 Figure 4.3 – Performance of the Vanguard 500 Index fund

Contemporary Investments: Chapter 4 Types of mutual funds – Cont. Broader categories Expansion in the number of categories New categories based on the types of stocks owned and the manager’s investment philosophy

Contemporary Investments: Chapter 4 Index funds How an index fund operates The popularity of index funds

Contemporary Investments: Chapter 4 Services offered Automatic reinvestment of distributions Automatic investment plans Check writing Exchange privileges Periodic statements and tax documents

Contemporary Investments: Chapter 4 Regulation and taxation SEC regulations Tax issues Funds are tax exempt Pass through income and capital gains to shareholders who are responsible for the taxes

Contemporary Investments: Chapter 4 Mutual fund fees and expenses Load charges Front end loads Back end loads (contingent deferred sales charges) Operating expenses

Contemporary Investments: Chapter 4 Mutual fund fees and expenses - Cont. What annual operating expenses pay for 12b-1 fees –Standardizing fees and expenses –Evaluating fees and expenses

Contemporary Investments: Chapter 4 Figure 4.4 – Total Expenses for Contrafund and Heartland Value

Contemporary Investments: Chapter 4 Figure 4.5 – Differences in Annual Wealth Due to Differences in Expenses

Contemporary Investments: Chapter 4 Mutual fund fees: Some points to remember –Fees vary widely –Fees can impact performance –No evidence of a relationship between fees and performance

Contemporary Investments: Chapter 4 Performance Evaluating historical performance Measuring returns Appropriate performance benchmark(s) Performance and risk

Contemporary Investments: Chapter 4 Figure 4.6 – Total Return Index for the Weitz Value Fund

Contemporary Investments: Chapter 4 Figure 4.7 – Performance of the Weitz Value Fund

Contemporary Investments: Chapter 4 Assessing future performance Evidence that past and future performance are unrelated Evidence that past performance is a reasonable, though not perfect, predictor of future performance

Contemporary Investments: Chapter 4 Performance and taxes Before versus after tax returns When not to buy shares of a mutual fund

Contemporary Investments: Chapter 4 Other types of investment companies Unit investment trusts How they operate Types of unit investment trusts Index depository receipts

Contemporary Investments: Chapter 4 Other types of investment companies – Cont. Closed-end investment companies How they operate Example of a closed end fund NAV discount Dual purpose funds

Contemporary Investments: Chapter 4 Figure 4.8A – Germany Fund

Contemporary Investments: Chapter 4 Figure 4.8B – The Germany Fund, Inc.