1. CHAPTER 4 Investments Mutual Funds and Other Investment Companies Slides by Richard D. Johnson Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved McGraw-Hill/Irwin Cover image

2. 4- 2 Cover image Services of Investment Companies  Administration & record keeping  Diversification & divisibility  Professional management  Reduced transaction costs

3. 4- 3 Cover image 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

4. 4- 4 Cover image Types of Investment Organizations  Unit Trusts  Managed Investment Companies –Open-End –Closed-End  Other investment organizations –Commingled funds –REITs –Hedge Funds

5. 4- 5 Cover image 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

6. 4- 6 Cover image Figure 4.1 Closed-End Mutual Funds

7. 4- 7 Cover image Figure 4.2 Listing of Mutual Fund Quotations

8. 4- 8 Cover image Investment Policies  Money Market  Equity  Specialized Sector  Bond  Balance & Income  Asset Allocation  Indexed  International

9. 4- 9 Cover image Table 4.1 U.S. Mutual Funds by Investment Classification, December 2004

10. 4- 10 Cover image How Funds Are Sold  Directly marketed  Sales force distributed  Revenue sharing on sales force distributed –Potential conflicts of interest  Financial supermarkets

11. 4- 11 Cover image Potential Conflicts of Interest - Revenue Sharing  Brokers put investors in funds that may that may not be the most appropriate  Mutual funds could direct trading to higher cost brokers  Revenue sharing is not illegal but it must be disclosed to the investor

12. 4- 12 Cover image 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

13. 4- 13 Cover image Table 4.2 Impacts of Costs on Investment Performance

14. 4- 14 Cover image Trading Scandal with Mutual Funds  Late trading – allowing some investors to purchase or sell later than other investors  Market timing – allowing investors to buy or sell on stale net asset values –International  Net effect is to transfer wealth from existing owners to the new purchasers or sellers

15. 4- 15 Cover image Potential Reforms  Strict 4:00 PM cutoff with late orders executed the following trading day  Fair value pricing with net asset values being adjusted for trading in open markets  Imposition of redemption fees

16. 4- 16 Cover image Taxes on Mutual Funds  Investor directed portfolios can be structured to take advantage of taxes while mutual funds cannot  High turnover leads to tax inefficiency  More disclosure on taxes was required in 2000

17. 4- 17 Cover image Exchange Traded Funds  ETF allow investors to trade index portfolios like shares of stock  Examples - SPDRs and Webs  Potential advantages –Trade continuously –Lower taxes –Lower costs  Potential disadvantages

18. 4- 18 Cover image Table 4.3 EFT Sponsors and Products

19. 4- 19 Cover image First Look at 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

20. 4- 20 Cover image Figure 4.3 Diversified Equity Funds versus Wilshire 5000 Index

21. 4- 21 Cover image Table 4.4 Consistency of Investment Results

22. 4- 22 Cover image Sources of Information on Mutual Funds  Wiesenberger’s Investment Companies  Morningstar (www.morningstar.com)  Yahoo (biz.yahoo.com / funds)  Investment Company Institute (www.ici.org)  Popular press  Investment services