Presentation on theme: "CHAPTER 4: INVESTMENT COMPANIES. Definition: financial intermediaries that collect funds from individual investors and invest those funds in a potentially."— Presentation transcript:
Definition: financial intermediaries that collect funds from individual investors and invest those funds in a potentially wide range of securities Administration & record keeping ◦ issue periodic status reports, keeping track of capital gain distributions, dividends, investments, and redemption Diversification & divisibility: diversify portfolios and investors can buy fractional shares of many different securities Professional management: full-time staffs of security analysts and portfolio managers Reduced transaction costs: can achieve substantial savings on brokerage fees and commissions because of large transactions
Net Asset Value ◦ Used as a basis for valuation of investment company shares ◦ Selling new shares ◦ Redeeming existing shares Calculation: Market Value of Assets - Liabilities Shares Outstanding Example: Consider a mutual fund that manages a portfolio of securities worth $120 mil. Suppose the fund owes $4 mil to its investment advisers and owes another $1mil for rent, wages and other expenses. The fund has 5mil shares outstanding. What is NAV of the fund
Pools of money from many investors that is invested in a portfolio fixed for the life of the fund Little active management Example: invest in municipal bond, corporate bond
Hire managers to manage portfolio Open-End ◦ stand ready to redeem or issue shares at their net asset value. If investors in open-end funds want to cash out shares, they sell back to the fund at NAV Closed-End ◦ Funds cannot issue or redeem shares. Investors who want to cash out must sell shares to other investors ◦ Sold at premium or discount to NAV ◦ Shares of close-end fund are traded on organized exchanges just like other common stocks.
◦ Commingled funds partnership of investors that pool their funds. Similar to open-end fund. Example: trust or retirement account that have portfolios much larger than those of most individual investors but still too small to warrant managing on a separate basis ◦ REITs: similar to closed-end fund but invest in real estate or loans secured by real estate ◦ Hedge Funds like mutual fund: hedge fund allows private investors to pool assets to be invested by a fund manager Unlike mutual fund: hedge fund are commonly structured as private partnerships and are not subject to many SEC regulations
mutual fund is a common name for open- end investment company. Account for >90% of investment company asset. Described in the prospectus Management companies manage a family of mutual funds. Some examples include: ◦ Fidelity ◦ Vanguard ◦ Putnam ◦ Dreyfus
Money Market: invest in money market securities. Equity: invest in stocks ◦ Income fund and growth fund Specialized Sector: sector funds Bond: invest in bond
Balanced Funds: hold both equities and fixed income securities in relatively stable proportions to meet needs of individual investors Asset Allocation and Flexible: similar to balance funds but the proportion can change according to managers’ forecasts Indexed: match performance of a broad market index. Example: Vanguard 500 Index Fund International
Fee Structure ◦ Front-end load: commission or sale charge paid when purchasing the shares ◦ Back-end load: redemption or exit fee incurred when you sell shares. Operating expenses 12 b-1 charges distribution costs paid by the fund Alternative to a load Fees and performance
Initial NAV = $20 Income distributions of $.15 Capital gain distributions of $.05 Ending NAV = $20.10:
Example: you purchased 1000 shares of the New Fund at a price of $20 at the beginning of the year. You paid a front-end load of 4%. The securities in which the fund invests increase in value by 12% during the year. The fund’s expense ratio is 1.2%. What is your rate of return on the fund if you sell your shares at the end of the year.
4.7 MUTUAL FUND INVESTMENT PERFORMANCE: A FIRST LOOK
Evidence shows that average mutual fund performance is generally less than broad market performance Evidence suggests that over certain horizons some persistence in positive performance ◦ Evidence is not conclusive ◦ Some inconsistencies