Mutual Funds and Alternative Investments by Matt Ingram Invest Ed® All Rights Reserved Oklahoma Securities Commission July 2016

What is a Mutual Fund? an investment portfolio that invests its shareholders’ money in a portfolio of securities More mutual funds exist today than stocks listed on the NYSE. Almost half of U.S. households own mutual funds (and most of those are in retirement accounts like 401(k) or IRAs). Over $6 Trillion in assets 2

Advantages of Owning Diversification Professional management Ability to invest in small amounts Automatic investing and withdrawals Convenience and Liquidity Fund families 3

Drawbacks to Owning Mutual Funds Transaction costs: management fees, loads, 12b-1 fees (Where can I find these?) Professional management can change. 75% of managed funds do not beat “the market.” Hidden use of leverage Sometimes funds close—then what? 4

Fund Topics Actively Managed Index Sector Funds Asset Class Load/No-load 5

Load vs. No-Load Funds A “load” fund charges a commission upfront to pay the broker who sold you the fund. There are front-load and back-load funds. No-load funds = no sales commissions These funds are cheaper and sold directly by the fund company to customers. If performance is equal, why pay commissions? 6

Mutual Fund Fees Of course no-load fund companies don’t work for free! Both kinds of funds (load, no-load) charge fees. 12 (b) -1 fee covers operating costs of fund company (usually less than 1%) Management fee is usually a percentage of total funds under management. (around 1%) You can shop around for the best (lowest) fees. 7

Exchange Traded Funds (ETF s ) Exchange Traded Funds (ETF s ) A basket of securities designed to track a specific market index Similar to index mutual funds Trades on an exchange (like a closed-end fund) Low mgt. expenses and turnover Famous ETFs: SPY, QQQQ, DIA Use of leverage and access to alternative investments 8

Funds and Private Equity Not really mutual funds, they are partnerships. Only sold to accredited investors (net worth and income requirements) Hold portfolios (usually with complex strategies) Different compensation for managers (2/20) Private Equity 9

Private Companies Each group will look up its assigned company. Explain the company’s business and if current social and macroeconomic trends help or hurt its growth prospects. Look up the company’s website, news stories, reviews. Feel free to state whether you would use the company’s services. 10

Derivatives Options are derivatives, unlike stocks. (i.e., Options derive their value from something else, the underlying security.) Options have expiration dates; stocks do not. Call and Put Options Leverage and Hedging 11

Futures A futures contract is an agreement to buy or sell a fixed amount of an asset (commodity or financial) at a fixed price on a specific date. The difference between a futures contract and an option contract is you don’t own the right, you own the asset (no such thing as limited liability here). The futures contract trades on an exchange (like an option contract). 12

Why Do Futures Exist? They play a very important economic function. Hedging Speculators Price discovery 13

Algorithmic Trading Computerized trading rules Rise of the machines Huge part of trading volume Flash Crash, May 2010 Lessons learned and investigation Movie, “Ghost Exchange” Book, Flash Boys 14

Invest Ed® STARS Project Invest Ed® distinguishes trader and investor. Its goal is to show students the advantages of being an investor as opposed to a trader. Long-term investing is an Invest Ed® goal. 15