Index or Managed Fund

1
Index or Managed Fund

• Presentation by
• Kerri Mills
• 9/10/2002

2
Problem Info

• 58 year old , retiring in 4 years
• 600,000 in company 403(b) plan
• Invested in Fidelity Magellan
• Recently switched to Vanguard
• 500 index fund
• 150,000 in various individual stocks, owns home,
  and no debt

3
403(b)

• Tax-sheltered retirement plans available to
  employees of government agencies and non-profit
  organizations such as hospitals and universities.
  A 403(b) account is established by an individual
  and is similar to an individual retirement
  account (IRA)

4
Index Funds

• Uses an investment approach that seeks to track
  the investment returns of a specified stock or
  bond market benchmark, or index
• Low cost is a key advantage of index funds
• Pays only minimal advisory fees
• Keeps operating expenses at the lowest possible
  level
• Keeps portfolio transaction costs at minimal
  level
• Investors can implement a wide range of
  distinctive investment strategies through indexing

5
Managed Funds

• A unit trust which allows investors to pool their
  money with that of other investors so that the
  fund can buy a wide range of investments
• Managed by a professional fund manager who makes
  the investment decisions

6
Compare Funds(Average Annual Total Return)
As of 7/31/2002 based on figures from
www.morningstar.com

• Fidelity Magellan
• -21.20
• -24.70
• -10.68
• 9.95

• Vanguard 500 Index
• -19.93
• -23.68
• -10.67
• 10.01

Year to Date 1 Year 3 Years 10 Years
7
Compare Funds

• Similar
• Price/Earnings Ratio
• Price/Book Ratio
• Earning Growth Rate
• Advantage Vanguard
• Return on Equity
• Less fees
• Advantage Magellan
• Rough Proxy for the Vanguard 500 Index

8
Fees and Expenses

• Fidelity Magellan
• 0.88
• None
• 35
• 3 Sales Charge
• None

• Vanguard 500 Index
• 0.18
• None
• None
• None
• None

Expense Ratio 12b-1 Fee Transaction Fee Purchase
Fee Redemption Fee
9
Solution

• Overall, the Vanguard 500 Index is the better
  option
• Considering age
• Risk involved
• Fees assessed
• Amount of return on investment