Investment Companies
In 1992 for first time in U.S. financial history, individuals no longer held a majority of all publicly traded U.S.
stocks. However, if one counts indirect ownership, the individual investor controls more than 50% of the stock.
Assets in mutual funds grew by more than tenfold in the 1980s to $1 trillion dollars and by June 1999 $6 trillion
dollars. Mutual funds owned almost 19% of all US stocks by the beginning of 1999.
Household Choices in Saving:
1.
Hold liabilities of traditional intermediaries (savings accounts,MMDAs)
2.
Hold securities directly
3.
Hold securities indirectly
Indirect investing refers basically to trading shares of investment companies.
Investment Companies
 Financial organization that sells shares on itself to the public and uses the funds it raises to invest in a portfolio
of securities such as money market instruments or stocks or bonds
 Don’t pay taxes on any distribution if
 Qualify as a regulated investment company (earns 90% of its income from security transactions) and
 If at least 90% of its taxable income each year is passed onto the shareholder
 Must register with the SEC
 Not insured or guaranteed
 Types:
 Managed

Closed-end

Open-end
 Unmanaged
Unmanaged Funds
Unit Investment Trusts
 Unmanaged, usually fixed income
 Handled by an independent trustee
 Redeemable trust certificates

Sold at the NAV + small commission
 All interest (dividend) and principal repayment distributed to holders
 Most hold tax-exempt securities
 Recently some have been created for stock
 Passive investment
 Designed to be bought and held with capital preservation as a major objective

Trust ceases to exist when the bond matures
 If conditions change, investor loses the ability to make rapid, inexpensive, or costless changes in their
portfolio
Managed Funds
(1) Closed End Funds
 Do not buy their shares back
 Capitalization is fixed until issue new public offering
 Shares trade in a secondary market
 Special type of closed-end fund---Dual Purpose Funds

Limited life

2 Classes

income

capital
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
Prices fluctuate widely from the NAV

Discount

Premium
(2) Open End Fund
 Referred to as a mutual fund
 Continues to sell shares after the initial sale of shares that starts the fund
 Capitalization continually changing
 Purchase
 Direct from fund
 Indirect from sales agent
 Fund must buy back shares at current NAV
 Fund is a corporation formed by an investment advisory firm that selects the board of trustees.
 Trustees hire a management company.
 Management company
 research
 manage the portfolio
 administrative chores
 receives a fee for services
 To get into a fund:
 2/3 require $1000 or less
 85% require $5000 or less
 IRA-minimum requirement often lower
Types of Mutual Funds:
 Short-term—money market
 Long-term—equity or bond or combination
Short-term----Money-Market Funds
 Portfolio consist of money-market instruments
 Three Types
 General Purpose
 Broker-dealer
 Institutional
 Funds can be
 Taxable
 Tax-exempt
 Taxable funds
 Commercial paper make up 40-50% of fund assets
 Avrg maturity –1-2 months
 SEC set max maturity at 90 days
 Tax-Exempt
 Types

National

State—invest in only one state
 No sales Charge
 No redemption charge
 Redeemed by phone or wire
 Management Fee
 Interest earned and credited daily
 Some offer check writing privileges
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
Not insured
Long-Term
 Equity and Bond/Income Funds
 Objective
 18 categories (Investment Company Institute)
 Other companies such as Lipper or Morningstar have a different number of categories
 investor matches their personal objective to fund objective

Stock Funds
 Account for 54% of total assets in the mutual funds market (1999)
 Stock funds can be divided into two main categories

Value

Growth

Funds can be sold either
 Directly by the company
 Sales force (brokers, insurance agents, and financial planners)
 Load Funds
 Sales fee when purchase
 Fee goes to marketing organization (the company itself or its sales force) selling the shares
 Fee split between the salesperson and the company selling the shares
 Typically no redemption fee (back-load)
 12b-1 fee
 distribution fee
 has ranged as high as 1% of average assets of fund
 50% of funds charge a 12b-1
 Combination of fees
 Different classes have different combination of sales charge, annial,12b-1 or redemption fees

No Load Funds
 Bought at NAV directly from the fund
 Investors must purchase and redeem by mail, wire, or phone
 Performance Benchmarks
 S&P 500 Composite Index
 Russell 2000 (index for small companies)

Returns
 Total return
 Cumulative total return
 Average annual return
Performance consistency has been researched and there is (as usual) conflicting evidence on whether past
performance can be maintained. As a result the index funds with lower expenses have gained popularity.

Operating expenses charged by all funds
 Management fees
 Overhead charges
 12b-1 fees
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Investing Internationally

Types

Mutual Funds

International funds

Global funds

Single country funds (usually closed-end funds)

US companies with strong earnings abroad

More volatile than the market as a whole

Passively managed country funds-geared to match a foreign stock index of a particular country
 Morgan Stanley’s World Equity Benchmark Shares (WEBS)
 Deutsche Morgan Grenfell’s Country Baskets
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