1. Investment Companies Some nomenclature Types (management companies) –Open-end (mutual fund): continuously sells and redeems (all transactions with issuer) –Closed-end: fixed number of shares issued (all post-issue transactions on market) Mutual fund structure –Fund adviser, distributor, directors –Family of funds (nature of ownership - mutual or for-profit) Competition –Insurance “special accounts” - variable annuities –Bank “agency accounts”

2. How does mutual fund operate? Services Investment (diversification) Voting Marketing/advertising Management Fees and expenses Marketing/advertising fees Advisory and investment expenses Management expenses QUESTIONS: How are mutual funds regulated? Why must mutual funds register? Why are mutual funds diversified? What does this mean? (75% of portfolio - not more than 5% in any one issuer, not more than 10% of stock of any one issuer) Reason for extensive federal regulation? Focus - disclosure, structure, ex ante prohibitions, ex post enforcement?

3. Types of portfolios Equity (more US mutual funds than US publicly-traded operating companies) Growth Large-cap Small-cap Index Sector International/global Debt Long-term Short-term Money market (priced daily so # shares = # dollars) Government Tax-free municipal Junk bonds QUESTIONS What drives investor choice of funds? How do MF investors allocate their investments? How do MF investors re-allocate their investments? Do mutual funds outperform the market (consider fees, expenses, taxes)?

4. The mutual fund “gorilla” Size (equity and debt) 2003 - $7,000 billion 1999 - $5,500 billion 1989 - $900 billion Percentage (US public equity market) 2003 - 25.0%* 2000 - 21.4% 1995 - 14.6% 1990 - 6.9% 1985 - 5.3% Under management – 33%

5. How is mutual fund managed? Mutual fund adviser does it all sets up fund (organized as corporation or business trust) chooses investment style puts in initial board of directors Directors (or trustees) are ostensible watchdogs approves advisory contract approves fees supervises conflicts of interest Computation of value Rule 22c-1: NAV at least once daily industry practice: 4:00pm EST QUESTIONS: Compare mutual fund to an operating corporation? Do (should) MF directors function like corporate directors?