Mutual Funds and Other Investment Companies

1
Chapter 4

• Mutual Funds and Other Investment Companies

2
Services of Investment Companies

• Administration record keeping
• Diversification divisibility
• Professional management
• Reduced transaction costs

3
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

4
Types of Investment Organizations

• Unit Trusts
• Managed Investment Companies
• Open-End
• Closed-End
• Other investment organizations
• Commingled funds
• REITs

5
Open-End and Closed-End Funds Key Differences

• Shares Outstanding
• Closed-end no change unless new stock is offered
• Open-end changes when new shares are sold or old
  shares are redeemed
• Pricing
• Open-end Net Asset Value(NAV)
• Closed-end Premium or discount to NAV

6
Investment Policies

• Money Market
• Fixed Income
• Equity
• Balance Income
• Asset Allocation
• Indexed
• Specialized Sector

7
Costs of Investing in Mutual Funds

• Fee Structure
• Front-end load
• Back-end load
• Operating expenses
• 12 b-1 charges
• distribution costs paid by the fund
• Alternative to a load
• Fees and performance

8
A First Look at Fund Performance

• Benchmark Wilshire 5000
• Results
• Most funds underperform
• Not fair comparison because of costs
• Adjusted Benchmark Wilshire 5000 with passive
  management costs considered
• The majority of funds still underperform

9
Consistency of Fund Performance

• Do some mutual funds consistently outperform?
• Evidence suggests that some funds show consistent
  stronger performance
• Depends on measurement interval
• Depends on time period
• Evidence shows consistent poor performance

10
Sources of Information on Mutual Funds

• Wiesenbergers Investment Companies
• Morningstar
• Investment Company Institute
• Popular press
• Investment services