Mutual Funds and Other Investment Companies Chapter 4 Mutual Funds and Other Investment Companies

Services of Investment Companies Administration & record keeping Diversification & divisibility Professional management Reduced transaction costs

Used as a basis for valuation of investment company shares. Net Asset Value Used as a basis for valuation of investment company shares. Selling new shares Redeeming existing shares Calculation Market Value of Assets - Liabilities Shares Outstanding

Types of Investment Organizations Unit Trusts Managed Investment Companies Open-End Closed-End Other investment organizations Commingled funds REITs

Open-End and Closed- End Funds: Key Differences Shares Outstanding Closed-end: no change unless new stock is offered. Open-end: changes when new shares are sold or old shares are redeemed. Pricing Open-end: Net Asset Value(NAV) Closed-end: Premium or discount to NAV

Investment Policies Money Market Fixed Income Equity Balance & Income Asset Allocation Indexed Specialized Sector

Costs of Investing in Mutual Funds Fee Structure Front-end load Back-end load Operating expenses 12 b-1 charges distribution costs paid by the fund Alternative to a load Fees and performance

Allow investors to trade funds based on indexes like stock. Examples Exchange Traded Funds Allow investors to trade funds based on indexes like stock. Examples SPDRS WEBS HOLDERS Allow sector specialization

A First Look at Fund Performance Benchmark: Wilshire 5000 Results Most funds underperform Not fair comparison because of costs Adjusted Benchmark: Wilshire 5000 with passive management costs considered. The majority of funds still under-perform.

Consistency of Fund Performance Do some mutual funds consistently outperform? Evidence suggests that some funds show consistent stronger performance. Depends on measurement interval Depends on time period Evidence shows consistent poor performance.

Sources of Information on Mutual Funds Wiesenberger’s Investment Companies Morningstar Investment Company Institute Popular press Investment services