chapter 4 - university of colorado...
TRANSCRIPT
![Page 1: CHAPTER 4 - University of Colorado Boulderleeds-faculty.colorado.edu/roca4364/MISC/FNCE4030_files/FNCE4030... · INVESTMENTS | BODIE, KANE, MARCUS 4-2 Investment Companies • Pool](https://reader030.vdocuments.us/reader030/viewer/2022021519/5b5c77037f8b9ad21d8c4445/html5/thumbnails/1.jpg)
INVESTMENTS | BODIE, KANE, MARCUS
Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin
CHAPTER 4
Mutual Funds and Other
Investment Companies
![Page 2: CHAPTER 4 - University of Colorado Boulderleeds-faculty.colorado.edu/roca4364/MISC/FNCE4030_files/FNCE4030... · INVESTMENTS | BODIE, KANE, MARCUS 4-2 Investment Companies • Pool](https://reader030.vdocuments.us/reader030/viewer/2022021519/5b5c77037f8b9ad21d8c4445/html5/thumbnails/2.jpg)
INVESTMENTS | BODIE, KANE, MARCUS
4-2
Investment Companies
• Pool funds of individual investors and
invest in a wide range of securities or other
assets.
• Services provided:
– Administration & record keeping
– Diversification & divisibility
– Professional management
– Reduced transaction costs
![Page 3: CHAPTER 4 - University of Colorado Boulderleeds-faculty.colorado.edu/roca4364/MISC/FNCE4030_files/FNCE4030... · INVESTMENTS | BODIE, KANE, MARCUS 4-2 Investment Companies • Pool](https://reader030.vdocuments.us/reader030/viewer/2022021519/5b5c77037f8b9ad21d8c4445/html5/thumbnails/3.jpg)
INVESTMENTS | BODIE, KANE, MARCUS
4-3
Net Asset Value
Calculation:
Market Value of Assets - Liabilities
Shares Outstanding
![Page 4: CHAPTER 4 - University of Colorado Boulderleeds-faculty.colorado.edu/roca4364/MISC/FNCE4030_files/FNCE4030... · INVESTMENTS | BODIE, KANE, MARCUS 4-2 Investment Companies • Pool](https://reader030.vdocuments.us/reader030/viewer/2022021519/5b5c77037f8b9ad21d8c4445/html5/thumbnails/4.jpg)
INVESTMENTS | BODIE, KANE, MARCUS
4-4
Types of Investment Companies
According to Investment Company Act of 1940:
• Unit Investment Trusts
• Managed Investment Companies
– Closed-end
– Open-end (aka Mutual Funds)
![Page 5: CHAPTER 4 - University of Colorado Boulderleeds-faculty.colorado.edu/roca4364/MISC/FNCE4030_files/FNCE4030... · INVESTMENTS | BODIE, KANE, MARCUS 4-2 Investment Companies • Pool](https://reader030.vdocuments.us/reader030/viewer/2022021519/5b5c77037f8b9ad21d8c4445/html5/thumbnails/5.jpg)
INVESTMENTS | BODIE, KANE, MARCUS
4-5
Types of Investment Companies
• Unit Trusts
– Fixed portfolio of uniform assets
– Unmanaged
– Cash out by selling back to Trustee,
which will disinvest or find new buyer
– Total assets have declined from $105
billion in 1990 to $29 billion in 2009
![Page 6: CHAPTER 4 - University of Colorado Boulderleeds-faculty.colorado.edu/roca4364/MISC/FNCE4030_files/FNCE4030... · INVESTMENTS | BODIE, KANE, MARCUS 4-2 Investment Companies • Pool](https://reader030.vdocuments.us/reader030/viewer/2022021519/5b5c77037f8b9ad21d8c4445/html5/thumbnails/6.jpg)
INVESTMENTS | BODIE, KANE, MARCUS
4-6
Types of Investment Companies
• Managed Investment Companies
– Closed-End
• No change in shares outstanding; old investors cash out by selling to new investors
• Priced at premium or discount to NAV
![Page 7: CHAPTER 4 - University of Colorado Boulderleeds-faculty.colorado.edu/roca4364/MISC/FNCE4030_files/FNCE4030... · INVESTMENTS | BODIE, KANE, MARCUS 4-2 Investment Companies • Pool](https://reader030.vdocuments.us/reader030/viewer/2022021519/5b5c77037f8b9ad21d8c4445/html5/thumbnails/7.jpg)
INVESTMENTS | BODIE, KANE, MARCUS
4-7
Types of Investment Companies
• Managed Investment Companies
– Open-End (Mutual Funds)
• Fund issues new shares when investors buy in and redeems shares when investors cash out
• Priced at Net Asset Value (NAV)
• Transactions are executed after market closes and NAV is computed (more about this later)
![Page 8: CHAPTER 4 - University of Colorado Boulderleeds-faculty.colorado.edu/roca4364/MISC/FNCE4030_files/FNCE4030... · INVESTMENTS | BODIE, KANE, MARCUS 4-2 Investment Companies • Pool](https://reader030.vdocuments.us/reader030/viewer/2022021519/5b5c77037f8b9ad21d8c4445/html5/thumbnails/8.jpg)
INVESTMENTS | BODIE, KANE, MARCUS
4-8
Types of Investment Companies
• Other investment organizations
– Commingled funds: partnership of
investors that pool money. Resemble
mutual funds (units instead of shares).
– REITs: similar to closed-end fund. Most
are leveraged. Equity and Mortgage trusts.
– Hedge Funds: pools of assets actively
managed. Lock-up periods. Leverage
and risk. More later in the textbook.
![Page 9: CHAPTER 4 - University of Colorado Boulderleeds-faculty.colorado.edu/roca4364/MISC/FNCE4030_files/FNCE4030... · INVESTMENTS | BODIE, KANE, MARCUS 4-2 Investment Companies • Pool](https://reader030.vdocuments.us/reader030/viewer/2022021519/5b5c77037f8b9ad21d8c4445/html5/thumbnails/9.jpg)
INVESTMENTS | BODIE, KANE, MARCUS
4-9
Mutual Funds: Open-End Investment Companies
• Money Market
• Equity
• Sector
• Bond
• Balanced
• Asset Allocation and Flexible
• Index
• International
![Page 10: CHAPTER 4 - University of Colorado Boulderleeds-faculty.colorado.edu/roca4364/MISC/FNCE4030_files/FNCE4030... · INVESTMENTS | BODIE, KANE, MARCUS 4-2 Investment Companies • Pool](https://reader030.vdocuments.us/reader030/viewer/2022021519/5b5c77037f8b9ad21d8c4445/html5/thumbnails/10.jpg)
INVESTMENTS | BODIE, KANE, MARCUS
4-10
Table 4.1 U.S. Mutual Funds by Investment Classification
10
![Page 11: CHAPTER 4 - University of Colorado Boulderleeds-faculty.colorado.edu/roca4364/MISC/FNCE4030_files/FNCE4030... · INVESTMENTS | BODIE, KANE, MARCUS 4-2 Investment Companies • Pool](https://reader030.vdocuments.us/reader030/viewer/2022021519/5b5c77037f8b9ad21d8c4445/html5/thumbnails/11.jpg)
INVESTMENTS | BODIE, KANE, MARCUS
Mutual Funds Market
4-11
(Year-end 2011)
Source: http://www.icifactbook.org/fb_ch2.html
![Page 12: CHAPTER 4 - University of Colorado Boulderleeds-faculty.colorado.edu/roca4364/MISC/FNCE4030_files/FNCE4030... · INVESTMENTS | BODIE, KANE, MARCUS 4-2 Investment Companies • Pool](https://reader030.vdocuments.us/reader030/viewer/2022021519/5b5c77037f8b9ad21d8c4445/html5/thumbnails/12.jpg)
INVESTMENTS | BODIE, KANE, MARCUS
Mutual Funds Flows ($bn)
4-12
Source: http://www.icifactbook.org/fb_ch2.html
![Page 13: CHAPTER 4 - University of Colorado Boulderleeds-faculty.colorado.edu/roca4364/MISC/FNCE4030_files/FNCE4030... · INVESTMENTS | BODIE, KANE, MARCUS 4-2 Investment Companies • Pool](https://reader030.vdocuments.us/reader030/viewer/2022021519/5b5c77037f8b9ad21d8c4445/html5/thumbnails/13.jpg)
INVESTMENTS | BODIE, KANE, MARCUS
4-13
How Funds Are Sold
• Direct-marketed funds (mail, phone internet)
• Sales force distributed (about half)
– Revenue sharing on sales force distributed (you ultimately pay for it)
– Potential conflicts of interest
– SEC: “Must tell prospective investors”
• Financial Supermarkets
– No charge but fee split with MF company
– Unified reporting
![Page 14: CHAPTER 4 - University of Colorado Boulderleeds-faculty.colorado.edu/roca4364/MISC/FNCE4030_files/FNCE4030... · INVESTMENTS | BODIE, KANE, MARCUS 4-2 Investment Companies • Pool](https://reader030.vdocuments.us/reader030/viewer/2022021519/5b5c77037f8b9ad21d8c4445/html5/thumbnails/14.jpg)
INVESTMENTS | BODIE, KANE, MARCUS
4-14
Costs of Investing in Mutual Funds
• Fee Structure: Four types
1. Operating expenses
2. Front-end load
3. Back-end load (contingent deferred sales fee)
4. 12 b-1 charge (misc. costs, broker commissions)
• Fees must be disclosed in the prospectus
• Share classes with different fee combinations
![Page 15: CHAPTER 4 - University of Colorado Boulderleeds-faculty.colorado.edu/roca4364/MISC/FNCE4030_files/FNCE4030... · INVESTMENTS | BODIE, KANE, MARCUS 4-2 Investment Companies • Pool](https://reader030.vdocuments.us/reader030/viewer/2022021519/5b5c77037f8b9ad21d8c4445/html5/thumbnails/15.jpg)
INVESTMENTS | BODIE, KANE, MARCUS
4-15
Example 4.2: Fees for Various Classes (Dreyfus Worldwide Growth Fund)
![Page 16: CHAPTER 4 - University of Colorado Boulderleeds-faculty.colorado.edu/roca4364/MISC/FNCE4030_files/FNCE4030... · INVESTMENTS | BODIE, KANE, MARCUS 4-2 Investment Companies • Pool](https://reader030.vdocuments.us/reader030/viewer/2022021519/5b5c77037f8b9ad21d8c4445/html5/thumbnails/16.jpg)
INVESTMENTS | BODIE, KANE, MARCUS
4-16
Fees and Mutual Fund Returns: An Example
Initial NAV = $20
Income distributions of $.15
Capital gain distributions of $.05
Ending NAV = $20.10:
$20.10 - $20.00 + $.15 + $.05Rate of Return = 1.5%
$20.00
1 0
0
NAV NAV Income and capital gain distributionsRate of return =
NAV
![Page 17: CHAPTER 4 - University of Colorado Boulderleeds-faculty.colorado.edu/roca4364/MISC/FNCE4030_files/FNCE4030... · INVESTMENTS | BODIE, KANE, MARCUS 4-2 Investment Companies • Pool](https://reader030.vdocuments.us/reader030/viewer/2022021519/5b5c77037f8b9ad21d8c4445/html5/thumbnails/17.jpg)
INVESTMENTS | BODIE, KANE, MARCUS
4-17
Table 4.2 Impacts of Costs on Investment Performance
All grow 12% p.a.
![Page 18: CHAPTER 4 - University of Colorado Boulderleeds-faculty.colorado.edu/roca4364/MISC/FNCE4030_files/FNCE4030... · INVESTMENTS | BODIE, KANE, MARCUS 4-2 Investment Companies • Pool](https://reader030.vdocuments.us/reader030/viewer/2022021519/5b5c77037f8b9ad21d8c4445/html5/thumbnails/18.jpg)
INVESTMENTS | BODIE, KANE, MARCUS
4-18
Late Trading and Market Timing
• Late trading – accepting buy or sell orders
after the market closes and NAV is determined
• Market timing – rapid in-and-out trading on
stale net asset values
• Net effect is to transfer value from ordinary
shareholders to privileged traders
Q. Why should MF managers allow this?
• Mutual funds penalized for improper trading.
New rules to prevent these practices
![Page 19: CHAPTER 4 - University of Colorado Boulderleeds-faculty.colorado.edu/roca4364/MISC/FNCE4030_files/FNCE4030... · INVESTMENTS | BODIE, KANE, MARCUS 4-2 Investment Companies • Pool](https://reader030.vdocuments.us/reader030/viewer/2022021519/5b5c77037f8b9ad21d8c4445/html5/thumbnails/19.jpg)
INVESTMENTS | BODIE, KANE, MARCUS
4-19
Taxation of Mutual Fund Income
• Pass-through status under the U.S. tax code
– Taxes are paid only by the investor (you)
– Fund investors do not control the timing of
the sales of securities from the portfolio
Q. What is the tax difference between short and
long term capital gain(loss)?
• Turnover = fraction of portfolio replaced
• High portfolio turnover (60% on average)
leads to tax inefficiency
![Page 20: CHAPTER 4 - University of Colorado Boulderleeds-faculty.colorado.edu/roca4364/MISC/FNCE4030_files/FNCE4030... · INVESTMENTS | BODIE, KANE, MARCUS 4-2 Investment Companies • Pool](https://reader030.vdocuments.us/reader030/viewer/2022021519/5b5c77037f8b9ad21d8c4445/html5/thumbnails/20.jpg)
INVESTMENTS | BODIE, KANE, MARCUS
4-20
Exchange Traded Funds (ETFs)
• Examples: “spiders”, “diamonds” and “cubes”
• Potential advantages:
– Trade continuously like stocks
– Can be sold short or purchased on margin
– Lower costs
– Tax efficient
• Potential disadvantages:
– Prices can depart by small amounts from NAV
– Must be purchased from a broker
![Page 21: CHAPTER 4 - University of Colorado Boulderleeds-faculty.colorado.edu/roca4364/MISC/FNCE4030_files/FNCE4030... · INVESTMENTS | BODIE, KANE, MARCUS 4-2 Investment Companies • Pool](https://reader030.vdocuments.us/reader030/viewer/2022021519/5b5c77037f8b9ad21d8c4445/html5/thumbnails/21.jpg)
INVESTMENTS | BODIE, KANE, MARCUS
Total Net Assets, Number of ETFs
4-21
Source: http://www.icifactbook.org/fb_ch3.html
$bn, year-end 2001-2011
![Page 22: CHAPTER 4 - University of Colorado Boulderleeds-faculty.colorado.edu/roca4364/MISC/FNCE4030_files/FNCE4030... · INVESTMENTS | BODIE, KANE, MARCUS 4-2 Investment Companies • Pool](https://reader030.vdocuments.us/reader030/viewer/2022021519/5b5c77037f8b9ad21d8c4445/html5/thumbnails/22.jpg)
INVESTMENTS | BODIE, KANE, MARCUS
4-22
Mutual Fund Investment Performance: A First Look
• Performance of actively managed funds:
– below the return on the Wilshire index in
23 of the 39 years from 1971 to 2009
– Evidence for persistent superior
performance (due to skill, and not just
good luck) is weak, but suggestive
– Bad performance more likely to persist
![Page 23: CHAPTER 4 - University of Colorado Boulderleeds-faculty.colorado.edu/roca4364/MISC/FNCE4030_files/FNCE4030... · INVESTMENTS | BODIE, KANE, MARCUS 4-2 Investment Companies • Pool](https://reader030.vdocuments.us/reader030/viewer/2022021519/5b5c77037f8b9ad21d8c4445/html5/thumbnails/23.jpg)
INVESTMENTS | BODIE, KANE, MARCUS
4-23
Information on Mutual Funds
• Fund’s prospectus describes:
– investment objectives
– Fund investment adviser and portfolio manager
– Fees and costs
• Statement of Additional Information (SAI)
– List of securities, etc. You must ask for it.
– aka Something Always Ignored
• Fund’s annual report
![Page 24: CHAPTER 4 - University of Colorado Boulderleeds-faculty.colorado.edu/roca4364/MISC/FNCE4030_files/FNCE4030... · INVESTMENTS | BODIE, KANE, MARCUS 4-2 Investment Companies • Pool](https://reader030.vdocuments.us/reader030/viewer/2022021519/5b5c77037f8b9ad21d8c4445/html5/thumbnails/24.jpg)
INVESTMENTS | BODIE, KANE, MARCUS
4-24
Information on Mutual Funds
• Wiesenberger’s Investment Companies
• Morningstar (www.morningstar.com)
• Yahoo (biz.yahoo.com/funds)
• Investment Company Institute (www.ici.org)
• Directory of Mutual Funds