Post on 19-Dec-2015
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Chapter 15 – Mutual Funds
• Pool money from investors with similar objectives and purchase a diversified portfolio run by a professional manager– Shares issued to investors– Fluctuate with value of portfolio– Investments broadly or narrowly diversified
• $7 trillion assets; ½ families own
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Recent Issues
• Until last year “squeaky clean”
• 2003 Whole series of conflicts– Late trading favoring large investors– Soft dollars– Proxy voting– Fees
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Advantages
• Diversification through pooling
• Professional management
• Minimum transaction costs
• Liquidity – open-end funds will buy back
• Flexibility – 8,600 funds; different goals
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Disadvantages
• Lower performance than market – expenses
• Costs vary- load fees, management, 12-b1
• Risk – not all funds truly safe (junk bonds)
• Can't avoid market risk
• Trade frequently causing short-term gains
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Open-End Funds
• Stand ready to issue new shares or buy back outstanding shares at Net Asset Value on a daily basis.
• NAV = value of all assets, less liabilities divided by number of shares– Current value of investments determine
value of each share– Open-end funds are largest type
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Other Types of Funds
• Closed-end – has fixed number of shares– Traded between investors; not sold back to mgr– Value may be above or below NAV
• Unit trusts – fixed pool of investments, often bonds. – Passively managed; bonds held to maturity
• Real Estate Investment Trusts (REIT's)– Equity, mortgage, and hybrid funds
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Costs of Mutual Funds
• Load charges – sales commissions on shares– 4% to 6% to 8.5% when you buy or– Back-end loads – paid when sold; sliding scale
• No-load funds – no sales charge– Deal directly with management company rather
than broker– No-load funds perform as well as load funds
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Other Fees
• Management Fees – about 1% of assets– Paid to “pick the winners”; but low correlation
• Expenses – no limit but should = actual cost– For administrative, trading, shareholder service
– Affected by turnover ratios
• 12b-1 marketing fees – range from zero to 1%– Advertising and promotion expense paid by fund
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Types of Funds and Objectives
• Money market mutual funds (MMMF's)• Stock funds – many types and objectives• Balanced funds – stocks and bonds for
steady income and moderate growth• Asset allocation – switch between stocks
and bonds depending on market outlook• Bond funds – income over growth
– High to low quality; municipal bond funds
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Mutual Fund Services
• Automatic investment or withdrawals
• Reinvestment of dividends and interest
• Can wire transfer funds Phone switching between funds
• Check writing on MMMF's - $250 min
• Bookkeeping services and tax reporting
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Buying a Mutual Fund
• Determine your goals
• Find fund to meet objectives; prospectus
• Evaluate fund's performance and costs– Past performance does not predict future– Fund doing well one year might not next
year
• Sources of info – Morningstar is best
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Prospectus
• Goals and strategies
• Manager's experience
• Performance over last ten years
• Fees, expenses and turnover ratios
• Shows assets in portfolio