Lecture Presentation Software
to accompany
Investment Analysis and
Portfolio Management
Sixth Edition
by
Frank K. Reilly & Keith C. Brown
Chapter 26
Version 1.2
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Chapter 26
Professional Asset Management
Questions to be answered:
• What are the different ways that professional
asset management firms can be organized?
• How has the structure of the asset
management industry changed over time?
• How are managers at investment advisory
firms compensated?
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Chapter 26
Professional Asset Management
• Who manages the investment company
portfolio and how are its managers
compensated?
• How do you compute the net asset value (NAV)
for an investment company?
• What is the difference between closed-end and
open-end investment companies?
• What is the difference between the NAV and
market price for a closed-end fund?
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Chapter 26
Professional Asset Management
• What are load fees, 12b-1 fees, and
management fees and how do they influence
investment company performance?
• What are the two major means of fund
distribution and what has been the trend for
each approach?
• Given the breakdown of all funds by
investment objectives, which groups have
experienced relative growth or decline?
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Chapter 26
Professional Asset Management
• Given a desire to have a personal portfolio
manager perform certain functions for you,
how do investment companies help fulfill this
need?
• What are the ethical dilemmas involved in the
professional asset management industry?
• What has been the risk-adjusted performance
of mutual funds relative to alternative market
indexes?
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The Asset Management Industry:
Structure and Evolution
1. Contract directly with a management and
advisory firm
relationship with client
assets under management (AUM)
separate accounts
customized
2. Commingling of investment capital of
several clients in an investment company
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What is an Investment Company?
• An investment company invests a pool of funds
belonging to many individuals in a portfolio of
individual investments such as stocks and bonds
• The total market value of all investments divided
by the number of fund shares outstanding is the
net asset value (NAV)
• Portfolio management is handled by an
investment management company
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Closed-End Versus Open-End
Investment Companies
• Closed-end investment company
– Stock trades on secondary market
– Net asset value (NAV) is determined twice daily, but
market price determined by supply and demand
– Discounts from NAV can be opportunities
• Closed-end fund index
• Open-end investment companies
– Mutual funds
– Sell and repurchase shares at NAV
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Mutual Fund Costs
• Load versus no-load open-end funds
– Load funds charge sales commission up to 8.5% of
NAV, but usually not a redemption fee
– No-load imposes no initial sales charge, so it sells
shares at NAV, but may charge a small redemption
fee of 1/2%
– Low-load imposes a front-end sales charge in the
3% range
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Other Expenses: 12b-1 Fees,
Rear-End Loads, Management
• Contingent deferred sales loads, or redemption
charges, or “rear-end loads”, decline over time
• Annual 12b-1 fee
• Details about funds charges are found in the
fund’s prospectus
• Fund management fees
• Portfolio turnover
• Expense ratios
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Types of Investment Companies
Based on Portfolio Objectives
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•
•
•
•
Common stock funds
Balanced funds
Taxable bond funds
Municipal bond funds
Money market funds
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Global Investment Companies
• Foreign funds
– International funds
– Global funds
• Fund categories, regions, countries
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Sources of Information
About Mutual Funds
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•
•
•
•
•
•
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•
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•
•
The Wall Street Journal
Barron’s - weekly and quarterly
Investment Companies
Mutual Funds Update
Mutual Funds Report
Closed-end Weekly Review
FundEdge
Management Results
Forbes
Business Week - “Mutual Fund Scoreboard”
Morningstar Mutual Funds
Value Line
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Ethics and Regulation in the Professional
Asset Management Industry
• Agency - looking out for the interest of
another
• Asset management industry is based on
handling someone else’s money
• Investment Company Act of 1940
• Securities Act of 1933
• Securities Act of 1934
• Investment Advisors Act of 1940
• ERISA (1974) - Prudent man rule
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Ethics and Regulation in the Professional
Asset Management Industry
• Association for Investment Management and
Research (AIMR) has a Code of Ethics and
Standards of Professional Conduct
• Chartered Financial Analyst (CFA)
• Compensation dilemma - incentives and risk
• Soft dollars
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Performance of Investment Companies
• Below average returns for actively managed
equity and bond funds
• Do a fund’s objectives matter?
– Positive relationship between stated objectives
and risk measures
• Do managers generally outperform the
market?
– Results are more consistent in shorter time
periods
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Your Portfolio Manager
1. Determine your risk-return preferences and develop a
portfolio that is consistent with them
2. Diversify your portfolio to eliminate unsystematic risk
3. Maintain your portfolio diversification and your desired risk
class while allowing flexibility so you could shift between
alternative investment instruments as desired
4. Attempt to achieve a risk-adjusted performance that is
superior to aggregate market performance
5. Administer the account, keep records of costs, provide
timely information for tax purposes, and reinvest dividends
if desired
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The Internet
Investments Online
www.nelnet.com
www.investools.com
www.investools.com/cgi-bin/server.ol/Newsletters/CEFD
www.fundsinteractive.com/index.shtml
www.wiesenberger.com
www.morningstart.net
www.mfea.com
www.mfmag.com
www.investorguide.com/MutualFunds.htm
www.ici.org
www.stocksmart.com/tr/tmf.html
www.mfcafe.com
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End of Chapter 26
–Professional Asset Management
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Future topics
Chapter 27
• Composite Portfolio Performance
Measures
• Performance Attribution Analysis
• Evaluation of Bond Portfolio
Performance
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Copyright © 2000 by Harcourt, Inc. All rights reserved.