1. 25
Mutual Funds
Zizhuo Zhang

2. Outline BACKGROUND OPEN-END MUTUAL FUNDS CLOSED-END MUTUAL FUNDS
EXCHANGE-TRADED FUNDS
CONCLUSION

3. Outline BACKGROUND OPEN-END MUTUAL FUNDS CLOSED-END MUTUAL FUNDS
EXCHANGE-TRADED FUNDS
CONCLUSION

4. Mutual Funds Started in Holland in 1774 & Appeared in U.S in 1824
One of the two largest financial intermediaries in the U.S
Owned by almost 50% of American families mutual funds
Over 50% of the assets
Defined contribution pension plans
Individual retirement plans

7. Outline BACKGROUND OPEN-END MUTUAL FUNDS CLOSED-END MUTUAL FUNDS
EXCHANGE-TRADED FUNDS
CONCLUSION

8. Open-end Mutual Funds By far the largest amount of assets
The tremendous growth in assets
A high rate of return in the capital markets
The huge inflows of new capital due in large part to the growth in the private pension market in the United States
The size of the expenses ratio
An annual fee captured in the fund’s expense ratio
A one-time fee called front-end or back-end road fee

9. Reasons for the decrease
The increased importance of passively managed index funds
More and more ownership of mutual funds occurs
The increased sensitivity of investors to expenses
The growth of mutual fund & individual account size in the industry

10. World Market for Mutual Funds

11. Outline BACKGROUND OPEN-END MUTUAL FUNDS CLOSED-END MUTUAL FUNDS
EXCHANGE-TRADED FUNDS
CONCLUSION

12. Closed-end Mutual Funds1
Introduction 2
Explaining the Discount 3
Why Closed-End Funds Exist

13. Introduction Trade on an exchange
Shares can be bought / sold at any time the market is open
A price determined by supply and demand
Sell at a discount from the net asset value of the holdings
The composition of the $239 billion
61% Bond funds & 39% Equity funds
69% Bond funds & 31% Equity funds (Domestic Assets)
In contrast with open-end funds

14. Explaining the Discount
Explanations for the discount
Liquidity of investments, management fees, management ability, tax liabilities, sentiment, greater risk of returns, size
Securities with a capital gain
A share in the assets & in a future potential tax liability
Using Expenses or the trade-off
A positive relationship between expenses and discounts
By the capitalized value of the services management adds

15. Explaining the Discount
Berk and Stanton (2007)
If management is entrenched, poor management relative to expenses leads to a discount
The balance means an average fund sells a discount
Two additioinal plausible explanations
For the size and existence of the discount
Behavioral
Capital market characteristics

16. Explaining the Discount
LS&T (1990)
Retail investors are at times overly optimistic / pessimisitc
Irrational sentiment risk
Elton, Gruber, and Busse (1996)
The discount on closed-end domestic stock
Behavioral
Capital market characteristics
Loadings on two risk factors (small-large &value-growth)

17. Why Closed-End Funds Exist
Classical reason
Organizational form: hold fewer liquid assets & less cash
Advantages
Account for some of the popularity of closed-end funds
Using large amounts of leverage to finance their investments
The impact of leverage
More closed-end bond funds than stock funds
Borrow short term in the form of floating rate preferred stock
Invest in longer-term bond funds

18. Why Closed-End Funds Exist
Three Factors
Tax law
Limited liability to the holder of fund shares
Lower borrowing costs to the fund compared to investor’s
The research proceeding to show
The leveraged closed-end bond funds are more desirable
24% of the cross-sectional differences in discount
Discounts vary over time as a function of the difference between long rates and short rates, a measure of the desirability of leverage

19. Outline BACKGROUND OPEN-END MUTUAL FUNDS CLOSED-END MUTUAL FUNDS
EXCHANGE-TRADED FUNDS
CONCLUSION

20. EXCHANGE-TRADED FUNDS
With the first fund starting in 1993
Designed to duplicate the S&P 500 index
A fast growing segment of mutual fund industry
At the close of the trading day, investors can create more shares of ETFs by turning in a basket of securities
The liquidity & the elimination of the risk of large deviations of price from net asset value, has helped account for the popularity of ETFs

21. EXCHANGE-TRADED FUNDS
Organized under three different sets of rules
The original ETF (spider) was organized as a trust
After spiders were organized as managed funds
A granter trust
Hold the shares directly
Retaining their voting rights
Receiving dividends and spinoffs

22. EXCHANGE-TRADED FUNDS
ETFs are stocks and trade on exchanges
A basket of securities rather than physical assets
After spiders were organized as managed funds
New shares can be created / Old shares can be deleted
The largest ETF is the spider

23. EXCHANGE-TRADED FUNDS
The principal issues
Tracking error
The relationship of price to NAV
Their performance relative to other indexing vehicles
Their use in price formation
The effect of leverage
Active ETFs

26. Performance relative to other instruments
Difference in performance depends on the skills
Matching the index
Expenses
Charter restrictions
Tax considerations
Distribute fewer capital gains than index funds

30. Outline BACKGROUND OPEN-END MUTUAL FUNDS CLOSED-END MUTUAL FUNDS
EXCHANGE-TRADED FUNDS
CONCLUSION

31. Conclusion This chapter Next chapter
A broad review of the variety & characteristic of mutual funds
Next chapter
The major tools for measuring mutual fund performance
Evidence on how well the industry has done

32. Q & A Thanks For Listening