Chapter Four Mutual Funds and Other Investment Companies INVESTMENTS | BODIE, KANE, MARCUS ©2018 McGraw-Hill Education. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill Education. Chapter Overview • Types of Investment Companies • Mutual funds: • Functions • Investment styles and policies • Investment costs • Performance • Sources of information INVESTMENTS | BODIE, KANE, MARCUS ©2018 McGraw-Hill Education 4-2 Chapter Overview • https://www.ilsole24ore.com/art/finanza-emercati/2018-10-02/-borse-come-robottrader-cavalca-il-populismo-212907.shtml?uuid=AEIR0KFG • https://it.wikipedia.org/wiki/Fondo_comune_ di_investimento INVESTMENTS | BODIE, KANE, MARCUS ©2018 McGraw-Hill Education 4-3 Investment Companies (1 of 2) • Pool funds of individual investors and invest in a wide range of securities or other assets • Services provided: • Record keeping and administration • Diversification and divisibility • Professional management • Lower transaction costs INVESTMENTS | BODIE, KANE, MARCUS ©2018 McGraw-Hill Education 4-4 Net Asset Value • Net Asset Value (NAV): • Calculation: Market Value of Assets - Liabilities Shares Outstanding INVESTMENTS | BODIE, KANE, MARCUS ©2018 McGraw-Hill Education 4-5 Investment Companies: Unit Investment Trusts Unit Investment Trusts Investment Companies Managed Investment Companies Other Investment Organizations • The portfolio that is fixed for the life of the fund. • Unmanaged • Declined from $105 billion (1990) to $94 billion (2016) INVESTMENTS | BODIE, KANE, MARCUS ©2018 McGraw-Hill Education 4-6 Investment Companies: Managed Investment Companies Unit Investment Trusts Investment Companies • Open-End Open-End Managed Investment Companies Other Investment Organizations Closed-End • Issues shares when investors buy; redeems shares when investors cash out • Priced at Net Asset Value (NAV) • Closed-End • Shares outstanding constant; investors cash out by selling to new investors • Priced at premium or discount to NAV INVESTMENTS | BODIE, KANE, MARCUS ©2018 McGraw-Hill Education 4-7 Investment Companies: Other Investment Organizations Unit Investment Trusts Investment Companies Managed Investment Companies Commingled Funds Other Investment Organizations REITs Hedge Funds • Commingled funds (https://www.investopedia.com/terms/c/commingledfund.asp): • REITs (Real Estate Investment Trust) è una società quotata che possiede e gestisce beni immobili commerciali fruttiferi: • Hedge Funds: INVESTMENTS | BODIE, KANE, MARCUS ©2018 McGraw-Hill Education 4-8 Mutual Funds Money Market Equity Sector Unit Investment Trusts Investment Companies Open-End Managed Investment Companies a.k.a. Mutual Funds Bond International Closed-End Other Investment Organizations Balanced and Fund of Funds Asset Allocation and Flexible a.k.a = also known as Index INVESTMENTS | BODIE, KANE, MARCUS ©2018 McGraw-Hill Education 4-9 Mutual Funds: Investment Policies (1 of 2) • Money Market: • Equity: • Bond: • Differenza ETF/Index Fund https://www.investopedia.com/ask/answers/03301 5/whats-difference-between-index-fund-andetf.asp INVESTMENTS | BODIE, KANE, MARCUS ©2018 McGraw-Hill Education 4-10 Mutual Funds: Investment Policies (2 of 2) • International: • Sector: (biotechnology, utilities, energy, or telecommunications) • Balanced: • Fund of Funds: • Asset Allocation: • Index: • Total Return: particolare tipo di fondi finalizzato all’ottenimento di un rendimento costante indipendente dall’andamento dei mercati. Si tratta quindi di investimenti finalizzati a un obiettivo di rendimento e di rischio esplicito che è compito del gestore del fondo raggiungere. Per ottenere queste prestazioni i gestori del fondo utilizzano un’asset allocation dinamica e un rigoroso controllo del rischio. INVESTMENTS | BODIE, KANE, MARCUS ©2018 McGraw-Hill Education 4-11 U.S. Mutual Funds by Investment Classification INVESTMENTS | BODIE, KANE, MARCUS ©2018 McGraw-Hill Education 4-12 Mutual Funds: How Funds Are Sold • How Funds Are Sold • Direct-marketed funds (mail, various offices of the fund, over the phone, or, more so, over the Internet) • Sales-force distributed • Revenue sharing on sales force distributed • Potential conflicts of interest • Financial supermarkets INVESTMENTS | BODIE, KANE, MARCUS ©2018 McGraw-Hill Education 4-13 Costs of Investing in Mutual Funds • Fee Structure: 1. Operating expenses (Shareholders do not receive an explicit bill for these operating expenses; however, the expenses periodically are deducted from the assets of the fund) 1. Front-end load (commission or sales charge applied at the time of the initial purchase of an investment) 2. Back-end load (commission or sales charge applied when selling mutual fund shares) 3. 12 b-1 charge (extra-charge: the SEC allows the managers of funds to use fund assets to pay for distribution costs such as advertising, promotional literature and, most important, commissions paid to brokers who sell the fund to investors. • Fees must be disclosed in the prospectus • Share classes with different fee combinations INVESTMENTS | BODIE, KANE, MARCUS ©2018 McGraw-Hill Education 4-14 Fees for Various Classes INVESTMENTS | BODIE, KANE, MARCUS ©2018 McGraw-Hill Education 4-15 Fees and Mutual Fund Returns NAV1 NAV0 Income Capital Gain R NAV0 • Example: • Initial NAV = $20 • Income distributions of $.15 • Capital gain distributions of $.05 • Ending NAV = $20.10 $20.10 $20.00 $.15 $.05 R .015 or 1.5% $20.00 INVESTMENTS | BODIE, KANE, MARCUS ©2018 McGraw-Hill Education 4-16 Impacts of Costs on Investment Performance Front-end load fund = termine riferito al complesso dei fondi comuni d’investimento che applicano ai propri sottoscrittori una commissione di entrata. INVESTMENTS | BODIE, KANE, MARCUS ©2018 McGraw-Hill Education 4-17 Taxation of Mutual Fund Income • Pass-through status under the U.S. tax code • Taxes are paid only by the investor • Fund investors do not control the timing of the sales of securities from the portfolio • High portfolio turnover leads to tax inefficiency • Average turnover = 50% To avoid taxes, each year a mutual fund has to pay out and pass through to its shareholders most of its net interest, dividends, and capital gains. You as the shareholder are taxed on your share of these items. INVESTMENTS | BODIE, KANE, MARCUS ©2018 McGraw-Hill Education 4-18 Exchange Traded Funds • Examples: “spiders,” “diamonds,” and “cubes” https://www.investopedia.com/articles/01/082901.asp • Potential advantages: • Trade continuously like stocks • Can be sold short or purchased on margin • Lower costs • Tax efficient • Potential disadvantages: • Prices can depart from NAV • Must be purchased from a broker INVESTMENTS | BODIE, KANE, MARCUS ©2018 McGraw-Hill Education 4-19 Growth of U.S. ETFs over Time INVESTMENTS | BODIE, KANE, MARCUS ©2018 McGraw-Hill Education 4-20 Investment Company Assets Under Management, 2015 ($ Billion) INVESTMENTS | BODIE, KANE, MARCUS ©2018 McGraw-Hill Education 4-21 Mutual Fund Investment Performance • Performance of actively managed funds: • Lagged Wilshire index in 27 of the 45 years (19712015) • Evidence for persistent superior performance is weak, but suggestive • Bad performance is more likely to persist INVESTMENTS | BODIE, KANE, MARCUS ©2018 McGraw-Hill Education 4-22 Diversified Equity Funds versus Wilshire 5000 Index https://us.spindices.com/documents/spiva/spiva-us-year-end-2017.pdf INVESTMENTS | BODIE, KANE, MARCUS ©2018 McGraw-Hill Education 4-23 Consistency of Investment Results INVESTMENTS | BODIE, KANE, MARCUS ©2018 McGraw-Hill Education 4-24 Information on Mutual Funds (1 of 2) • Fund’s prospectus describes: • Investment objectives • Fund investment adviser and portfolio manager • Fees and costs • Statement of Additional Information (SAI) • Fund’s annual report INVESTMENTS | BODIE, KANE, MARCUS ©2018 McGraw-Hill Education 4-25 Information on Mutual Funds (2 of 2) • Morningstar • Yahoo • Investment Company Institute • Directory of Mutual Funds INVESTMENTS | BODIE, KANE, MARCUS ©2018 McGraw-Hill Education 4-26
