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Mutual Funds and Other Investment Companies: Session 5
Mutual Funds and Other Investment Companies: Session 5
Other Investment
Companies
Session 5
Chapter 4
Chapter 4 Learning Objectives
Describe an Investment Company
Investment Styles
ETFs 03
04 Costs in Mutual Funds
Fund Performance 05
1. Investment Companies
Financial intermediary
Pooling funds from individuals
Investing in range of stocks, assets
Features
Record keeping / administration
Diversification w/ many securities
Professional management
Lower transaction fees
Net Asset Value
Value of each share
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Net Asset Value
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Net Asset Value
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Ex) ABC Fund Share Price
Asset under management = $2,905.1 million
Current Liability = $36.1 mil
79.6 mil outstanding shares
Calculate share price
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Types of Investment Companies
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B. Open-end vs Closed-end Fund
1. Open-end fund
A fund that issues or redeems its shares at NAV
# of outstanding shares changes when new shares are
sold or old shares are redeemed
2. Closed-end fund
Do not issues new shares
Buy and sell from other investors
Price can differ from NAV
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D. REITs
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E. Hedge Funds
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E. Hedge Funds
Speculative/Risky Trading
Leverage: Borrow money to amplify return
Short selling, Futures/options, Currency
Not subject to SEC Regulation
“Two and Twenty” Fee
• 2% management fee + 20% cut from gains
10k+ funds, $3.2 trillion (2015)
Chapter 20 (FIN3130)
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2. Mutual Funds
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Mutual Funds
Open-end Investment Company
Regulated by SEC
Specific investment policy
Dominant type
9,260 U.S. funds, $15 trillion
$15 trillion (non-U.S. funds)
Account for 88% of assets
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7 Investment Policies
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Investment Policies (cont.)
3. Sector Funds
particular industry
4. Bond Funds
Fixed income securities
5. International Funds
6. Balanced Funds
Mixture of stocks and bonds
Targeted-maturity funds
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Investment Policies (cont.)
7. Index Funds
Match performance of market
index
• Mimic stock, bond real estate index
• Diversification
• Low cost
• Ex) Vanguard 500 Index Fund
replicates S&P500 basket
20% of equity funds (2014)
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Index Fund
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Indexing Strategy
For who?
believe in the efficient market
prefer to diversify to lower risk
Modern Portfolio Theory (Chp 6,7)
Market portfolio has the highest
return for a given risk
Apple higher return (?), but 2-3
times more risk than mkt
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3. Exchange Traded Funds (ETF)
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Exchange Traded Funds (ETF)
Offshoots of index mutual funds
Diversification
Advantages over mutual funds
Trade continuously throughout day
Can be short or purchased on margin
No minimum requirement
Disadvantage
Price can deviate from NAV slightly
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ETF.com
Examples of ETFs
SPY: S&P500
DIA: Dow Jones
QQQ: Nasdaq
VTI: Total stock market
EFA: MSCI EAFE (developed
countries)
VWO: FTSE emerging markets
http://www.etf.com/etfanalytics/etf-finder
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ETF.com
Examples of ETFs
SPY: S&P500
DIA: Dow Jones
QQQ: Nasdaq
VTI: Total stock market
EFA: MSCI EAFE (developed
countries)
VWO: FTSE emerging markets
http://www.etf.com/etfanalytics/etf-finder
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Figure 4.2 Assets in ETFs
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4 Reasons To Invest In ETFs
Sample Quiz
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4. Costs of Investing in Mutual Funds
Operating Expense
Management fee
Expense Ratio (0.05%-2%)
periodically deducted from NAV
Load Fee
Front-end: sales commission
Back-end: redemption fee
12b-1 Charges
Marketing / Distribution cost
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Expense Ratios
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Ex 4.2 Expenses and Rates of Return
XYZ fund
10 mil outstanding shares
$100 mil in assets
10% value increase
expense ratio = 1%
Is rate of return = 10% - 1%?
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Sample Quiz
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5. Mutual Fund Performance
3 key questions
Q1: Do mutual funds outperform
market?
Q2: Do good managers consistently
outperform market?
Q3: Do funds with higher expense
perform better?
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Q1. Outperform Market?
On average, does a mutual fund
outperform market?
Complete answer:
How to measure risk-adjusted return?
Textbook Chapters 5, 8, 18
Simple answer:
No. Evidence shows that average mutual
fund performance is generally less than
broad market performance
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2016 SPIVA (Index vs Active) U.S. Scorecard
http://us.spindices.com/search/?ContentType=SPIVA
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Q2. Do Stars Consistently Outperform?
Do good managers
consistently outperform?
No!
Does Past Performance Matter?
The Persistence Scorecard
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Q3. Higher Fee = Higher performance?
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Advantages of S&P500, TSM index funds
1. Diversification
2. Consistency
Beats 70% of active funds
3. Low cost (ER ~ 0.05%)
4. Low tax
5. Simplicity
6. Modern Portfolio Theory
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Sample Quiz
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Summary
Investment Company
Mutual Funds
ETFs
Performance
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