MUTUAL FUNDS OPERATION

1
MUTUAL FUNDS OPERATION

• CHAPTER 23

2
INVESTMENT COMPANIES

• Definition of an Investment Company
• A pool of funds belonging to individuals used to
  acquire a collection of individual securities
  such as stocks, bonds, or other publicly traded
  securities. The value of shares in the fund is
  determined daily by the Net Asset Value (NAV).
• Management of Investment Companies
• Portfolio Managers
• Investment Analysts
• Transfer Agent

3
INVESTMENT COMPANIES

• Types of Funds
• Open-Ended
• Investment pools which continue to take investor
  funds
• Redemptions by fund at Net Asset Values (NAV)
• Closed-End Funds
• A one-time subscription.
• Stock traded in secondary market stock price
  typically lt NAV
• No redemptions by fund if you want out, sell in
  market. (NYSE, AMEX)
• Load vs. No-Load Open-End Funds
• Exchange traded ETF
• Hedge Funds

4
INVESTMENT COMPANIES

• Investment Company Portfolio Objectives
• Common Stock Funds
• Growth, Income, GI, International, Sector,
  Specialized
• Balanced Funds dividend paying stocks bonds
• Bond Funds, Money Market Fund, Real Estate
  Investment Trusts
• Hedge Funds
• Performance of Investment Companies
• Sharpe Study Excess Return per Unit of Risk
• Few funds outperform the DJIA
• Jensen Study Examining intercept term (a)
• alpha abnormal return Is alpha different from
  zero?
• Results funds earn 1.1 less per year given
  their level of risk
• Carlson Study three categories, none
  outperformed the SP 500

5
INVESTMENT COMPANIES

• Implications of Performance Studies
• For market efficiency you cannot beat the market
• For active versus passive management
• Risk reduction through diversification
• The exception
• Warren Buffet (Berkshire Hathaway)
• Long-run average performance measurement bias

6
REGULATION

• SEC is principal oversight body
• Investment Company Act (1940) is primary
  legislation as amended
• 1993 Prospectus requires revealing names, etc.,
  of managers.
• 90 of income must be distributed to investors
• Investment Advisor Act must register if more
  than 25 million under management.

7
HOMEWORK QUESTION

• What important services do Investment Companies
  provide investors?
• How do Open-end and Closed-end funds differ?
• What is the advantage of a no-load fund?
  Advantage of a front-end load fund?
• Why are there different types of funds?
• How does the Sharpe Measure differ from the
  Jensen measure?
• Is there a hidden quality in the Jensen Measure?
• Overall, what is the verdict on Professional Fund
  Managers (in general)?