chapter 3 mutual funds and other managed investments

Chapter 3Chapter 3

MUTUAL FUNDS AND OTHER MANAGED INVESTMENTS

1.2Investments Chapter 3

Chapter 3 Questions

What is a mutual fund? How does one compute the net asset value (NAV)? What expenses and changes might a mutual fund

investor face? What does research on mutual fund performance

tell about fund expenses, portfolio turnover, and returns?

What is a good procedure for determining which mutual funds to purchase?

When might it be appropriate to sell shares in a mutual fund?

What are the similarities between mutual funds and some other managed investments?


Mutual Fund Growth

Mutual funds have become very popular investment vehicles.

Nearly $7 trillion in total assets in 2002.

Total assets have grown 600% since 1990.


我国证券投资基金发展的历史起源于 1992 年，规范的基金起源于 1998 年 3 月

2007 年 9 月 21 日，我国共批准设立 59 家基金管理公司，其中合资基金管理公司 28 家。所有基金管理公司管理基金 341 只，基金总规模为 18962 亿份，金额达 30228 亿元，基金净值也已经是年初的 3.1 倍。

目前，我国基金投资帐户数已经超过 9000 多万个


证券之星－基金概况晨星中国


What is a mutual fund?

Mutual funds are open-end investment companies. The fund sells shares to the public and invests the

proceeds in a pool of funds, which are jointly owned by the fund’s investors.


Computing Net Asset Value

For investors, the performance of their investment depends on what happens to the fund’s per share value, or net asset value (NAV).

NAV= Market Value of Assets – Liabilities

Number of Shares Outstanding


Mutual Fund Management

Most funds are started by investment management

companies who hire the fund manager to make investment

decisions.

Fidelity, Vanguard, etc.

Usually offer many different funds and allow investors to

switch between funds.

Funds (open-end) sell additional shares to those who want to

invest, redeem shares at the NAV (less any fees) to those

who want to sell their shares.


Why invest with mutual funds?

Liquidity

Funds buy and sell their own shares quickly, even if fund

investments are illiquid

Diversification

Small minimum investment buys a typically well-diversified

investment

Professional management and record-keeping

Expertise and services


Why invest with mutual funds?

Choice and flexibilityFamilies of funds offer a variety of investments to

match investor needs

IndexingSome funds track a broad market index which insures

that investors will earn the “market return”

Increasingly popular mutual fund alternative


Mutual Fund Drawbacks

Active trading contributes to high costs which lower fund returns

Tax consequences can be a disadvantageTax impacts of asset trading are passed through to

investorsTax bill can be large even when the NAV falls


Mutual Fund Returns

Three sources of return:

Income distributions (ID)

Bond interest, stock dividends

Capital gain distributions (CGD)

Realized gains/losses from selling assets

Changes in NAV (NAV)

From unrealized gains/losses from assets


Mutual Fund Returns

Return = (ID + CGD + NAV)/Beg.NAV

By dividing the sum of the three components of

dollar returns by the beginning NAV, we have the

mutual fund’s holding period return.

Most mutual funds allow investors to either receive

distributions in cash or to reinvest in additional

shares.


Types of Mutual Funds

Funds can be classified according to the type of security in which they investStock FundsTaxable Bond FundsMunicipal Bond FundsStock and Bond FundsMoney Market Funds


Common Stock Funds

Most popular type of fund Wide variety with different objectives and levels of

riskGrowthIndustry or sector fundsGeographic areasInternational or GlobalEquity Index funds


Taxable Bond Funds

Generally seek to generate current income with limited risk Can vary by maturity

Short-term, Intermediate-term, Long-term Can vary by type of bond

GovernmentCorporateMortgage-backedInternational/GlobalBond Index funds


Municipal Bond Funds

Provide investors with income exempt from Federal taxation

Often concentrate on single states to avoid state income taxation as well


Stock and Bond Funds

Seek to provide a combination of income and value appreciation.

Different namesBalanced fundsBlended fundsFlexible funds


Money Market Funds

Provide safe, current income with high liquidity Invest in money market securities

T-bills, Bank CD’s, Commercial paper, etc. NAV stays at $1; income either paid out or

reinvested daily Provide an alternative to bank deposits, but not

FDIC insured


Mutual Fund Innovations

Life-stage fundsOffer different mixes of securities based on the age of

the investor

Supermarket fundsOffer a wide variety of funds with “one-stop” fund

shoppingTransfer services between fundsExpenses/fees can be high


Mutual Fund Prospectus

Must be available to investors and should be review by investors.

Contains:Fund’s investment objectiveInvestment strategyPrincipal risks faced by investorsRecent investment performanceExpenses and feesLots of other detailed information


Mutual Fund Expenses and Considerations

LoadsCommission to the broker to financial advisor who sold the

fund to the investorFor load funds, the offer price is the fund’s NAV less the load

(while no-load funds are sold at their NAV)Load range from around 3% (low-load) to 8.5%

12b-1 FeesFees deducted from the asset value of the fund to cover

marketing expensesAn alternative to loads



Deferred Sales LoadsRedemption charges when fund shares are sold (rather than

when purchased)Often high (5-7%) if shares are sold within the first year, but

then fall over time, perhaps even disappearing eventually Share Classes

Many funds offer several different classes of shares (A-B-C) with different fee structures

Best choice usually depends of investment horizon



Management FeesFees deducted from the fund’s asset value to

compensate the fund managersSome adjust fees according to the fund’s performance

Expense ratioAdding all fees and calculating expenses as a

percentage of the fund’s asset

%100assetsnet

expenses of sumratio exp

averageense


Portfolio TurnoverNot an explicit cost, but very important determinant of

shareholder returnsTrading costs rise with turnoverIn order for high turnover to pay off, fund managers must be

successful in their active trading strategies

Sources of InformationWall Street Journal, Business WeekMorningstar

Fund history, tax efficiency, risk analysisHexun http//funds.hexun.comSina http://finance.sina.com.cn/fund/


securitiesfundfor

periodholdingveragearateover turn

months12

portfolio


Mutual Fund Return and Risk Performance

Return Performance On a risk-adjusted basis, the average stock fund under-

performs market averages While portfolio managers seem to out-perform the market

before expenses, net returns are below the market index Some above-average performers over short time horizons,

but such performance is not generally sustained (just luck?) These results help to explain the growing popularity of index

funds



Risk Performance While returns are not consistent, risk is Objectives lead to strategies that lead to varying

degrees of investment risks Return is positively related to the level of risk Risk is therefore an important consideration



Fees and expenses: Do higher fees pay off? Investment performance is no better (and perhaps worse) for

load funds vs. no-load Expenses lower returns in predictable ways – lower expense

funds give better returns Turnover affects returns in several ways, including taxes –

high turnover means more short-term realized gains Tax efficiency is an important consideration – after-tax

returns may be 30-40% less than pre-tax

returntax -Pre

return adjusted-taxefficiency Tax


•Mutual Fund Investment Strategies

Choose in funds consistent with your objectives, constraints, and tax situation.

Consider index funds for a large portion of your fund portfolio.

When possible, invest in no-load funds with below-average expense and turnover ratios.

Invest at least 10-20% in international or global funds. Own funds in different asset classes and consider life-

cycle investing.


•Mutual Fund Investment Strategies

If you actively manage your portfolio, consider the past year’s “hot funds.”

Do not attempt to time the market; timing strategies add little except costs and risk.

Use dollar cost averaging by investing a set dollar amount each month.

Avoid investing money shortly before the capital gain distribution dates (prospectus).

Do not own too many funds. You will get average returns with high expenses.


When should you sell a mutual fund?

Personal considerationsPortfolio rebalancing points due to life cycle considerations

Be aware of the quick trigger, selling on the first dip in NAV; think long-term

Be aware of capital gains with selling fund shares

Fund considerationsChange in portfolio managerChange in investment styleFund is growing “too large” or “too fast”Persistent bad performance


Other Managed Investments

Closed-end investment companies Shares trade like stock rather than being bought

and sold from the fund Number of shares are fixed Often sell at a discount from NAV (a puzzle for

modern finance) Often a means of investing in a pool of assets from

a foreign country



Exchange-traded funds (ETFs) Relatively new, yet very popular Like closed-end funds, they trade like individual stocks Passively managed to mirror a market index, both broad and

narrow Low expenses, but do involve brokerage commissions Tax and liquidity concerns

More detail about ETF

http://baike.baidu.com/view/92662.htm



LOF (Listed Open-end Fund) 是指在交易所上市交易的开放式证券投资基金，也称为

“上市型开放式基金”。 LOF 的投资者既可以通过基金管理人或其委托的销售机构以基金净值进行基金的申购、赎回，也可以通过交易所市场以交易系统撮合成交价进行基金的买入、卖出

chapter 3 mutual funds and other managed investments

Documents

fund investments

investments chapter

mutual fund management

mutual fund performance

funds investors

different funds

pool of funds

liquidity funds