1. McGraw-Hill/Irwin © 2007 The McGraw-Hill Companies, Inc., All Rights Reserved. Mutual Funds and Other Investment Companies CHAPTER 4

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

3. 4-3 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 Shares Outstanding

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

5. 4-5 Open-End and Closed-End Funds: Key Differences Shares Outstanding 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 Pricing Open-end: Net Asset Value(NAV) Closed-end: Premium or discount to NAV

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

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

8. 4-8 Investment Policies Money Market Equity Specialized Sector Bond Balance & Income Asset Allocation IndexedInternational

9. 4-9 Table 4.1 Classification of U.S. Mutual Funds

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

11. 4-11 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 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 Table 4.2 Impacts of Costs on Investment Performance

14. 4-14 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 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 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 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 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

19. 4-19 Figure 4.3 Percentage of Funds Below Wilshire 5000

20. 4-20 Table 4.4 Consistency of Investment Results

21. 4-21 Sources of Information on Mutual Funds Wiesenberger’s Investment Companies Morningstar (www.morningstar.com) Yahoo (biz.yahoo.com/funds) Investment Company Institute Popular press Investment services