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Bodie Kane Marcus Perrakis RyanINVESTMENTS, Fourth Canadian Edition Copyright © McGraw-Hill Ryerson Limited, 2003 Slide 4-1 Chapter 4.

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Presentation on theme: "Bodie Kane Marcus Perrakis RyanINVESTMENTS, Fourth Canadian Edition Copyright © McGraw-Hill Ryerson Limited, 2003 Slide 4-1 Chapter 4."— Presentation transcript:

1 Bodie Kane Marcus Perrakis RyanINVESTMENTS, Fourth Canadian Edition Copyright © McGraw-Hill Ryerson Limited, 2003 Slide 4-1 Chapter 4

2 Bodie Kane Marcus Perrakis RyanINVESTMENTS, Fourth Canadian Edition Copyright © McGraw-Hill Ryerson Limited, 2003 Slide 4-2 Chapter Summary  Objective: To give an overview of institutional investing and institutions’ role in portfolio selection and management Institutional investors: objectives & constraints Mutual funds and investment policies Performance appraisal Taxation & tax sheltering

3 Bodie Kane Marcus Perrakis RyanINVESTMENTS, Fourth Canadian Edition Copyright © McGraw-Hill Ryerson Limited, 2003 Slide 4-3 Institutional Investors Type of InvestorRisk Tolerance Individual and personal trusts Life cycle Mutual fundsVariable Pension fundsDepends on proximity of payouts Endowment fundsGenerally conservative Insurance companiesConservative BanksVariable

4 Bodie Kane Marcus Perrakis RyanINVESTMENTS, Fourth Canadian Edition Copyright © McGraw-Hill Ryerson Limited, 2003 Slide 4-4 Constraints in Portfolio Management  Liquidity  Investment horizon  Regulatory constraints (institutional investors) The prudent person law Limits on foreign holdings Limits on individual firm holdings

5 Bodie Kane Marcus Perrakis RyanINVESTMENTS, Fourth Canadian Edition Copyright © McGraw-Hill Ryerson Limited, 2003 Slide 4-5  Administration & record keeping  Diversification & divisibility  Professional management  Reduced transaction costs  Increased investment opportunities Services of Investment Companies

6 Bodie Kane Marcus Perrakis RyanINVESTMENTS, Fourth Canadian Edition Copyright © McGraw-Hill Ryerson Limited, 2003 Slide 4-6 Types of Investment Companies  Mutual funds Closed-end Open-end Load funds  Commingled funds  Real estate funds Real estate limited partnerships Mortgage funds

7 Bodie Kane Marcus Perrakis RyanINVESTMENTS, Fourth Canadian Edition Copyright © McGraw-Hill Ryerson Limited, 2003 Slide 4-7 Types of Mutual Funds (Investment Policies)  Money market funds  Equity funds (income, growth)  Fixed-income funds  Balanced and income funds  Asset allocation funds  Index funds  Specialized sector funds

8 Bodie Kane Marcus Perrakis RyanINVESTMENTS, Fourth Canadian Edition Copyright © McGraw-Hill Ryerson Limited, 2003 Slide 4-8  Used as a basis for valuation of investment company shares Selling new shares Redeeming existing shares  Calculation: Net Asset Value

9 Bodie Kane Marcus Perrakis RyanINVESTMENTS, Fourth Canadian Edition Copyright © McGraw-Hill Ryerson Limited, 2003 Slide 4-9 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 Open-End and Closed- End Funds: Key Differences

10 Bodie Kane Marcus Perrakis RyanINVESTMENTS, Fourth Canadian Edition Copyright © McGraw-Hill Ryerson Limited, 2003 Slide 4-10 Summary Reminder  Objective: To give an overview of institutional investing and institutions’ role in portfolio selection and management Institutional investors: objectives & constraints Investment policies Performance appraisal Taxation & tax sheltering

11 Bodie Kane Marcus Perrakis RyanINVESTMENTS, Fourth Canadian Edition Copyright © McGraw-Hill Ryerson Limited, 2003 Slide 4-11  Fee Structure Front-end load Back-end load  Operating expenses  Other charges (called ‘12b-1’ in US) Distribution costs paid by the fund Alternative to a load  Fees and performance Costs of Investing in Mutual Funds

12 Bodie Kane Marcus Perrakis RyanINVESTMENTS, Fourth Canadian Edition Copyright © McGraw-Hill Ryerson Limited, 2003 Slide 4-12 Summary Reminder  Objective: To give an overview of institutional investing and institutions’ role in portfolio selection and management Institutional investors: objectives & constraints Investment policies Performance appraisal Taxation & tax sheltering

13 Bodie Kane Marcus Perrakis RyanINVESTMENTS, Fourth Canadian Edition Copyright © McGraw-Hill Ryerson Limited, 2003 Slide 4-13 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 underperform

14 Bodie Kane Marcus Perrakis RyanINVESTMENTS, Fourth Canadian Edition Copyright © McGraw-Hill Ryerson Limited, 2003 Slide 4-14 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

15 Bodie Kane Marcus Perrakis RyanINVESTMENTS, Fourth Canadian Edition Copyright © McGraw-Hill Ryerson Limited, 2003 Slide 4-15  Wiesenberger’s Investment Companies  Morningstar (PalTrak)  Investment Company Institute  Popular press  Investment services Sources of Information on Mutual Funds

16 Bodie Kane Marcus Perrakis RyanINVESTMENTS, Fourth Canadian Edition Copyright © McGraw-Hill Ryerson Limited, 2003 Slide 4-16 Exchange-Traded Funds  Passive vs Active investing  Low fees  Exchange index funds  Specialized ETFs (bonds, sub-indices and sectors)  International index funds

17 Bodie Kane Marcus Perrakis RyanINVESTMENTS, Fourth Canadian Edition Copyright © McGraw-Hill Ryerson Limited, 2003 Slide 4-17 Summary Reminder  Objective: To give an overview of institutional investing and institutions’ role in portfolio selection and management Institutional investors: objectives & constraints Investment policies Performance appraisal Taxation & tax sheltering

18 Bodie Kane Marcus Perrakis RyanINVESTMENTS, Fourth Canadian Edition Copyright © McGraw-Hill Ryerson Limited, 2003 Slide 4-18 The Canadian Tax System  Interest income taxed as ordinary income  Favorable dividend income treatment  Only 50% of capital gains taxed Superficial loss rule Imputed interest taxed as income

19 Bodie Kane Marcus Perrakis RyanINVESTMENTS, Fourth Canadian Edition Copyright © McGraw-Hill Ryerson Limited, 2003 Slide 4-19 Tax Deferral and Shelters  Tax-deferral option for capital gains  Tax-deferred retirement plans  Deferred annuities Fixed annuities Variable annuities  Tax shelters

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