McGraw-Hill/Irwin Copyright © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved. Mutual Funds and Other Investment Companies CHAPTER 4

INVESTMENT COMPANIES

4-3 Managed Investment Companies: Open-End and Closed-End Open-End Investment Companies 1.Redeem or issue shares at their net asset value (NAV) 2.When investors “cash out” their shares, they sell them back to the fund at NAV. 3.Although not required, virtually all funds continuously offer new fund shares to the public. Closed-End Investment Companies 1.Do not redeem or issue shares 2.When investors “cash out”, they sell their shares to other investors 3.Issue a fixed number of shares traded on the exchanges 4.Sold at premium or discount to NAV: PUZZLE!!

4-4 Figure 4.1 Closed-End Mutual Funds

4-5 Investment Companies: Net Asset Value 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 Shares Outstanding

MUTUAL FUNDS 1.Open-end investment companies 2.Account for >90% of investment company assets 3.$21.8 trillion assets under management worldwide 4.$10.4 trillion in the US market 5.Over 8,000 mutual funds

4-7 Investment Policies Described in the prospectus Management companies manage a family of mutual funds. Some examples include: –Fidelity –Vanguard –Putnam –Dreyfus

4-8 Table 4.1 Mutual Funds by Investment Classification

COSTS OF INVESTING IN MUTUAL FUNDS

4-10 Fee Structure (I) Front-end load : Effectively reduce your investment 1.commission or sales charges paid when you buy the shares 2.Range: from no-load to 8.5% Back-end load : 1.Exit fee 2.5%-6% which may decline by 1% for every year of your holding

4-11 Fee Structure (II) Operating expenses 1.range from 0.2% to 2% 2.include administrative expenses and advisory fees 3.payment in the form of reduced value of the funds 12 b-1 charges 1. distribution costs (advertising, promotional literature, commissions, tec.) paid by the fund 2.Deducted from the fund value 3.Alternative to a load Information available from CDA/Wiesenberger or Morningstar’s Mutual Fund Sourcebook

4-12 Example 4.1 From Text Expense Ratio = Operating Expenses/Avr. NAV

4-13

4-14 Fees and Mutual Fund Returns Initial NAV = $20 Income distributions of $.15 Capital gain distributions of $.05 Ending NAV = $20.10:

EXCHANGE-TRADED FUNDS

4-16 Exchange Traded Funds ETF allow investors to trade index portfolios like shares of stock First introduced in 1993 Potential advantages –Trade continuously; Short Sales and Purchase on Margin possible –Lower taxes –Lower costs

4-17 Exchange Traded Funds

4-18

4-19

MUTUAL FUND INVESTMENT PERFORMANCE: A FIRST LOOK

4-21 Mutual Fund Performance Evidence shows that average mutual fund performance is generally less than broad market performance Evidence suggests that over certain horizons some persistence in positive performance –Evidence is not conclusive –Some inconsistencies

4-22 Sources of Information Wiesenberger’s Investment Companies Morningstar ( Yahoo (finance.yahoo.com/funds) finance.yahoo.com/funds Investment Company Institute Popular press Investment services