Investing in Funds

October 27, 2008

This Week: Investing in Funds

What to Look For in Actively Managed Funds

Expense Ratio

Tax Efficiency

Investing Goals and Style

Management Incentives and Interests Ownership Fee Structure

Historical Returns But be careful because historical returns often aren’t

indicative of future returns!

Examples of Value-Oriented Funds

Fairholme (FAIRX)

Longleaf Partners (LLPFX)

Sequoia Fund (SEQUX)

Periods of underperformance when value is out of favor.

Relying on the decisions of management.

Exchange Traded Funds (ETFs)

If the ETF tracks an index, you don’t have to worry about tax efficiency, evaluating a manager, but do pay attention to expenses!

“A security that tracks an index, a commodity, or a basket of stocks like an index fund, but trades like a stock on an exchange.”

Pay same commission as a regular trade ($7 at Scottrade, remember to use limit orders).

Buy and sell anytime markets are open.

Keeping ETFs Fairly Priced: Arbitrage

ETFs have an underlying net asset value (NAV).

Depending on supply and demand, the price of an ETF may deviate from its NAV.

When trading at a discount, authorized arbitragers can buy ETF shares and exchange those shares for the underlying securities and sell those securities, or vise-versa if the ETF is trading at a premium.

This keeps the price of the ETF close to its NAV, and thus fairly valued.

Examples of ETFs

Sector-Specific

Country-Specific: EWZ, EWY, FXI

Commodities, Dynamic Indexes

Index Funds: VTI, VEU, VNQ, VWO, IVV, SPY

Simple Indexed ETF Portfolio

60% VTI – Vanguard Total Stock Market Index, ER 0.07%

40% VEU – Vanguard FTSE All World Ex-US Index, ER 0.25%

Add bonds later

Weighted ER of 0.14%

Holds Over 5,000 Stocks

Index Mutual Funds

Higher minimums.

Better for small, frequent purchases (DCA). Avoid trading costs by buying directly.

Only priced and traded at the close of the day.

Vanguard (generally $3,000 minimum).

MorningstarAvailable via OSU libraries and ccig.osu.edu:http://proxy.lib.ohio-state.edu/login?url=http://library.morningstar.com

Morningstar

Aggregates Fund Data Expenses Historical Returns After-Tax Returns Holdings Also Rating System and Analyst Reports

Portfolio X-Ray Displays data for a portfolio of funds

Sometimes more data than you really need…

Holdings

Fees a

nd Ta

xes

Some Related Reading

A Random Walk Down Wall Street by Burton Malkiel

Common Sense on Mutual Funds by Jack Bogle

The Bogleheads’ Guide to Investing

Morningstar’s Guide to Mutual Funds

Summary

Do some research, read one or two books and you will be set.

Weigh the pros and cons of investing in active versus passive funds.

CCIG generally is not focused on investing in funds, but we can point you in the right direction.

Remember that enterprising investors may still choose ETFs for easy and inexpensive exposure to specific industries, countries, etc.

Questions?

Club Portfolio

Goals

Show by realistic example how to choose investments.

Provide a sample portfolio of value investments for a college-aged investor.

Learn about different stocks and companies and what makes them attractive investment opportunities.

Encourage discussion and debate.

Maintain records of the portfolio to learn from mistakes and successes.

Parameters

Start with $20,000 cash.

Trades cost $7 (Scottrade pricing).

Placing a trade requires that a majority of present and voting members approve the transaction.

Provide rationale and analysis (as well as continuing discussion) for each investment on the appropriate forum page.

Analysis

Reason for Buying

Selling Strategy / Expected Duration

Reason for Selling

Analysis (what went well, what didn’t)

Core-Mark (CORE)

Vote on the forum!

Voting will close Tuesday night (with the votes tallied Wednesday morning).

Questions?

Suggested Meeting Topics?

Comments on the First Few Weeks

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