1. Chapter 11 Investment Companies

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

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

4. Advantages Offered by Funds Diversification Professional management Custodial and other services

5. 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

6. Discount From Net Asset Value Adams Express $10.75 $12.12 12.8%

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

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

9. Unit Trust Fixed portfolio Passive investment

10. 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

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

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

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

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

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

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

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

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

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

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

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

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

23. Selected Aggregate Fund Returns 1997 - 2001 Annual Return Growth8.9% Large-cap9.4 Small-cap9.9 Balanced8.0 International2.8 S&P 50010.7

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

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

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

27. 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