Investment Companies
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”
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?
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)?
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%
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?
