1. Investing in Funds October 27, 2008

2. This Week: Investing in Funds

3. What to Look For in Actively Managed Funds  Expense Ratio  Tax Efficiency  Investing Goals and Style  Management Incentives and Interests  Ownership  Fee Structure  Historical Returns  But be careful because historical returns often aren’t indicative of future returns!

4. Examples of Value-Oriented Funds  Fairholme (FAIRX)  Longleaf Partners (LLPFX)  Sequoia Fund (SEQUX)  Periods of underperformance when value is out of favor.  Relying on the decisions of management.

5. Exchange Traded Funds (ETFs)  If the ETF tracks an index, you don’t have to worry about tax efficiency, evaluating a manager, but do pay attention to expenses!  “A security that tracks an index, a commodity, or a basket of stocks like an index fund, but trades like a stock on an exchange.”  Pay same commission as a regular trade ($7 at Scottrade, remember to use limit orders).  Buy and sell anytime markets are open.

6. Keeping ETFs Fairly Priced: Arbitrage  ETFs have an underlying net asset value (NAV).  Depending on supply and demand, the price of an ETF may deviate from its NAV.  When trading at a discount, authorized arbitragers can buy ETF shares and exchange those shares for the underlying securities and sell those securities, or vise-versa if the ETF is trading at a premium.  This keeps the price of the ETF close to its NAV, and thus fairly valued.

7. Examples of ETFs  Sector-Specific  Country-Specific: EWZ, EWY, FXI  Commodities, Dynamic Indexes  Index Funds: VTI, VEU, VNQ, VWO, IVV, SPY

8. Simple Indexed ETF Portfolio  60% VTI – Vanguard Total Stock Market Index, ER 0.07%  40% VEU – Vanguard FTSE All World Ex-US Index, ER 0.25%  Add bonds later  Weighted ER of 0.14%  Holds Over 5,000 Stocks

9. Index Mutual Funds  Higher minimums.  Better for small, frequent purchases (DCA).  Avoid trading costs by buying directly.  Only priced and traded at the close of the day.  Vanguard (generally $3,000 minimum).

10. Morningstar Available via OSU libraries and ccig.osu.edu: http://proxy.lib.ohio-state.edu/login?url=http://library.morningstar.com

11. Morningstar  Aggregates Fund Data  Expenses  Historical Returns  After-Tax Returns  Holdings  Also Rating System and Analyst Reports  Portfolio X-Ray  Displays data for a portfolio of funds  Sometimes more data than you really need…

12. Holdings

13. Fees and Taxes

14. Some Related Reading  A Random Walk Down Wall Street by Burton Malkiel  Common Sense on Mutual Funds by Jack Bogle  The Bogleheads’ Guide to Investing  Morningstar’s Guide to Mutual Funds

15. Summary  Do some research, read one or two books and you will be set.  Weigh the pros and cons of investing in active versus passive funds.  CCIG generally is not focused on investing in funds, but we can point you in the right direction.  Remember that enterprising investors may still choose ETFs for easy and inexpensive exposure to specific industries, countries, etc.

16. Questions?

17. Club Portfolio

18. Goals  Show by realistic example how to choose investments.  Provide a sample portfolio of value investments for a college-aged investor.  Learn about different stocks and companies and what makes them attractive investment opportunities.  Encourage discussion and debate.  Maintain records of the portfolio to learn from mistakes and successes.

19. Parameters  Start with $20,000 cash.  Trades cost $7 (Scottrade pricing).  Placing a trade requires that a majority of present and voting members approve the transaction.  Provide rationale and analysis (as well as continuing discussion) for each investment on the appropriate forum page.

20. Analysis  Reason for Buying  Selling Strategy / Expected Duration  Reason for Selling  Analysis (what went well, what didn’t)

21. Core-Mark (CORE)  Vote on the forum!  Voting will close Tuesday night (with the votes tallied Wednesday morning).

22. Questions? Suggested Meeting Topics? Comments on the First Few Weeks

23. ccig.osu.edu