Chapter 11 Investment Companies

Closed-end Open-end (commonly called a mutual fund)

Important General Information Net asset value (NAV) - the value of a share Taxation - pass through vehicles

Advantages Offered by Funds Diversification Professional management Custodial and other services

Closed-end Investment Companies Fixed capital structure Shares are bought and sold in the secondary markets Shares may sell for a premium or discount from NAV Tendency for shares to sell at a discount from NAV

Discount From Net Asset Value Adams Express $10.75 $ %

Sources of Return to the Investor Income distributions (dividends) Capital gains distributions Appreciation in the NAV Change in the discount/premium

Real Estate Investment Trust (REIT) Specialized closed-end investment company Portfolio of properties and/or mortgages

Unit Trust Fixed portfolio Passive investment

Open-end Investment Companies - Mutual Funds Have a variable capital structure Shares are bought and sold (redeemed) from the mutual fund Shares cannot sell for a discount from NAV

The Load Fee Charged to investor when the shares are purchased Compensates the sales person –is analogous to brokerage commissions for buying securities

The Load Fee May vary with dollar amount invested Load expenses cause investors to pay a premium over the fund's NAV

No-load Mutual Fund Mutual fund without a sales charge Other fees and expenses apply

Other Fees and Expenses Early withdrawal fees (exit fees or reverse load) Management fees Operating expenses 12b-1 fees

Mutual Fund Portfolios May be classified by –type of investment –investment style

Types of Investments Growth funds Balanced funds Income funds Growth and income funds Specialized funds

Specialized Funds Sector funds Bond funds Global funds International funds Single country or regional funds Index Funds

Investment Styles Large cap Mid-size cap Small cap Growth Value

Capitalization Total market value of a company’s stock Price of the stock times number of shares outstanding

Growth A strategy designed to identify companies that offer exceptional opportunity for capital appreciation

Value A strategy designed to identify companies whose stock price appears to be below some estimate of the firm's intrinsic value

Returns Earned by Funds Advantages do not necessarily include superior returns Tendency to underperform the market

Selected Aggregate Fund Returns Annual Return Growth8.9% Large-cap9.4 Small-cap9.9 Balanced8.0 International2.8 S&P

Factors that Affect Investors’ Returns Expenses Fees –load fees and exit fees –12b-1 fees Movements in the market

Impact of Taxation on Investors Fund report returns before tax Shareholders pay applicable taxes Shareholders realize after-tax returns

Selecting Funds Low fees and portfolio turnover Timing of distributions Tax efficiency

Index Funds and Exchange - Traded Funds (ETFs) Use of index (e.g. S&P 500) Diversification - only market risk Low fees Low taxes Cannot outperform the market Return should mirror the market return