1. Chapter 8 Investment Co. indirect investment types fees objectives regulation ETFs indirect investment types fees objectives regulation ETFs

2. I. Indirect investment investment co.  pools investor funds  purchases & manages portfolio  direct investments investors  own shares of portfolio  indirect investment investment co.  pools investor funds  purchases & manages portfolio  direct investments investors  own shares of portfolio  indirect investment

3. advantagesadvantages diversification & asset choice  small amount of capital professional management lower transactions costs  trading  information diversification & asset choice  small amount of capital professional management lower transactions costs  trading  information

4. disadvantagesdisadvantages lack of control over portfolio  choice of assets  tax consequences of trading lack of voting rights  that come w/ common stock lack of control over portfolio  choice of assets  tax consequences of trading lack of voting rights  that come w/ common stock

5. II. Types sell new shares, redeem existing shares  # shares changes over time sell new shares, redeem existing shares  # shares changes over time Open-end funds (mutual funds)

6. share price based on NAV  NAV computed at close of day  NAV changes with price of assets in portfolio  NAV computed at close of day  NAV changes with price of assets in portfolio NAV = portfolio value - liabilities # shares outstanding

7. growth of mutual funds less than 600 1980 over 8000 today ($6.2 trillion)  assets concentrated with largest funds why?  growth of 401(k)s, IRAs  demographics (baby boomers) less than 600 1980 over 8000 today ($6.2 trillion)  assets concentrated with largest funds why?  growth of 401(k)s, IRAs  demographics (baby boomers)

8. Closed-end funds < 500 funds ($130 billion) fixed # shares initially issued  no later sales or redemptions  # of shares is fixed shares bought and sold in secondary market  price depends on supply & demand < 500 funds ($130 billion) fixed # shares initially issued  no later sales or redemptions  # of shares is fixed shares bought and sold in secondary market  price depends on supply & demand

9. share price & NAV  price < NAV -- trading at a discount  price > NAV -- trading at a premium many closed end fund shares trade a a discount share price & NAV  price < NAV -- trading at a discount  price > NAV -- trading at a premium many closed end fund shares trade a a discount

10. Unit Trusts # shares fixed typically invest in bonds portfolio is fixed: no active trading fixed termination date # shares fixed typically invest in bonds portfolio is fixed: no active trading fixed termination date

11. III. Mutual fund fees sale charges operating expenses sale charges operating expenses

12. Sales charges funds originally sold 2 ways:  sales force, w/ commission -- front-end load (8.5% max) -- pay when purchase shares -- back-end load (8.5% max) -- pay when redeem shares -- level loads (.75% max) -- annual fee funds originally sold 2 ways:  sales force, w/ commission -- front-end load (8.5% max) -- pay when purchase shares -- back-end load (8.5% max) -- pay when redeem shares -- level loads (.75% max) -- annual fee

13.  buy funds directly -- no sales charge -- no load funds today many distribution channels  fund supermarkets  fund families  “distribution is king”  buy funds directly -- no sales charge -- no load funds today many distribution channels  fund supermarkets  fund families  “distribution is king”

14. Operating Expenses management fee distribution fees  12b-1 fees (SEC rule)  1% max (100 basis pts.)  cover marketing costs other  trading, records, auditing management fee distribution fees  12b-1 fees (SEC rule)  1% max (100 basis pts.)  cover marketing costs other  trading, records, auditing

15. All fees NASD, SEC set some limits on fees  most funds charge much less average  actively managed funds: 1.44%  index funds:.4% NASD, SEC set some limits on fees  most funds charge much less average  actively managed funds: 1.44%  index funds:.4%

16. impact of fees $10,000, 10% annual return, 20 yrs. if fees 1.5% annually,  $49,725 if fees.5% annually,  $60,858 $10,000, 10% annual return, 20 yrs. if fees 1.5% annually,  $49,725 if fees.5% annually,  $60,858

17. IV. Fund Objectives funds differ in  types of assets  investment goals funds differ in  types of assets  investment goals

18. Equity funds income funds  stocks w/ high, stable dividends growth funds  stock w/ high expected capital gains growth/income funds income funds  stocks w/ high, stable dividends growth funds  stock w/ high expected capital gains growth/income funds

19. value funds  “bargain” stocks -- low PE ratio -- high book-to-value ratio sector funds  stocks in specific industry  health care, biotech, financial, electronics value funds  “bargain” stocks -- low PE ratio -- high book-to-value ratio sector funds  stocks in specific industry  health care, biotech, financial, electronics

20. market capitalization  small/mid/large cap funds  stocks based on size of company -- value of total shares outstanding international/global  international stock portfolio or  stock in particular region market capitalization  small/mid/large cap funds  stocks based on size of company -- value of total shares outstanding international/global  international stock portfolio or  stock in particular region

21. index funds  match performance of stock index -- S&P 500, Wilshire 5000  hold portfolio the matches index  passive strategy -- match, not beat, the market’s average return  lower expenses index funds  match performance of stock index -- S&P 500, Wilshire 5000  hold portfolio the matches index  passive strategy -- match, not beat, the market’s average return  lower expenses

22. index fund returns slightly below index return  operating expenses  must hold some cash to redeem shares index fund returns slightly below index return  operating expenses  must hold some cash to redeem shares

23. why I like indexing 1990-99  S&P 500 index outperformed 76% of all actively managed stock funds 1990-99  S&P 500 index outperformed 76% of all actively managed stock funds

24. Bond funds U.S. Government Investment grade corporate  bond ratings BBB or above High yield corporate  junk bonds (rated below BBB) Municipal bonds  tax exempt interest U.S. Government Investment grade corporate  bond ratings BBB or above High yield corporate  junk bonds (rated below BBB) Municipal bonds  tax exempt interest

25. Money Market share price = $1, check-writing general taxable U.S. Government tax-exempt share price = $1, check-writing general taxable U.S. Government tax-exempt

26. Stocks & Bonds balanced funds hybrid funds asset allocation funds  529 plans for college balanced funds hybrid funds asset allocation funds  529 plans for college

27. Fund Families one investment company many different funds Fidelity, Vanguard, Strong, Janus 400 families  top ten hold over 40% of assets one investment company many different funds Fidelity, Vanguard, Strong, Janus 400 families  top ten hold over 40% of assets

28. look at some top funds http://quicktake.morningstar.com/Fund/Snapsho t.asp?Country=USA&Symbol=FGRIX http://quicktake.morningstar.com/Fund/Snapsho t.asp?Country=USA&Symbol=FGRIX http://quicktake.morningstar.com/Fund/Snapsho t.asp?Country=USA&Symbol=VWLTX http://quicktake.morningstar.com/Fund/Snapsho t.asp?Country=USA&Symbol=VWLTX http://quicktake.morningstar.com/Fund/Snapsho t.asp?Country=USA&Symbol=VFINX http://quicktake.morningstar.com/Fund/Snapsho t.asp?Country=USA&Symbol=VFINX http://quicktake.morningstar.com/Fund/Snapsho t.asp?Country=USA&Symbol=FSPHX http://quicktake.morningstar.com/Fund/Snapsho t.asp?Country=USA&Symbol=FSPHX http://quicktake.morningstar.com/Fund/Snapsho t.asp?Country=USA&Symbol=FGRIX http://quicktake.morningstar.com/Fund/Snapsho t.asp?Country=USA&Symbol=FGRIX http://quicktake.morningstar.com/Fund/Snapsho t.asp?Country=USA&Symbol=VWLTX http://quicktake.morningstar.com/Fund/Snapsho t.asp?Country=USA&Symbol=VWLTX http://quicktake.morningstar.com/Fund/Snapsho t.asp?Country=USA&Symbol=VFINX http://quicktake.morningstar.com/Fund/Snapsho t.asp?Country=USA&Symbol=VFINX http://quicktake.morningstar.com/Fund/Snapsho t.asp?Country=USA&Symbol=FSPHX http://quicktake.morningstar.com/Fund/Snapsho t.asp?Country=USA&Symbol=FSPHX

29. V. Regulation SEC is main regulator  disclosure rules  fees  insider trading  “truth in advertising” -- returns & risks -- name and objective of fund SEC is main regulator  disclosure rules  fees  insider trading  “truth in advertising” -- returns & risks -- name and objective of fund

30. NASD is industry self-regulator  sales practices  commissions, fees taxation  investment co. distributes 90% of income annually  fund shareholders taxed on gains -- even if gains are reinvested -- dividends no longer taxable NASD is industry self-regulator  sales practices  commissions, fees taxation  investment co. distributes 90% of income annually  fund shareholders taxed on gains -- even if gains are reinvested -- dividends no longer taxable

31. taxation trap as share holders redeem shares  funds sells assets to raise cash  remaining share holders face tax liability as share holders redeem shares  funds sells assets to raise cash  remaining share holders face tax liability

32. VI. Exchange-traded funds (ETFs) like index funds & closed-end fund shares traded on exchange trade continually, not just at closing NAV swap large blocks of stock for ETF shares  price is always close to NAV like index funds & closed-end fund shares traded on exchange trade continually, not just at closing NAV swap large blocks of stock for ETF shares  price is always close to NAV

33. ETF tax advantage mutual funds  other investors sell shares, -- trigger tax liability for remaining share holders ETFs  tax liability only for seller  swap shares for underlying portfolio mutual funds  other investors sell shares, -- trigger tax liability for remaining share holders ETFs  tax liability only for seller  swap shares for underlying portfolio