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Investment Companies

Investment Companies. Some nomenclature Types (management companies) Open-end (mutual fund): continuously sells and redeems (all transactions with issuer) Closed-end: fixed number of shares issued (all post-issue transactions on market) Mutual fund structure

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Investment Companies

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  1. Investment Companies Some nomenclature Types (management companies) Open-end (mutual fund): continuously sells and redeems (all transactions with issuer) Closed-end: fixed number of shares issued (all post-issue transactions on market) Mutual fund structure Fund adviser, distributor, directors Family of funds (nature of ownership - mutual or for-profit) Competition Insurance “special accounts” - variable annuities Bank “agency accounts”

  2. How does mutual fund operate? Services • Investment (diversification) • Voting • Marketing/advertising • Management Fees and expenses • Marketing/advertising fees • Advisory and investment expenses • Management expenses QUESTIONS: • How are mutual funds regulated? Why must mutual funds register? • Why are mutual funds diversified? What does this mean? (75% of portfolio - not more than 5% in any one issuer, not more than 10% of stock of any one issuer) • Reason for extensive federal regulation? Focus - disclosure, structure, ex ante prohibitions, ex post enforcement?

  3. Types of portfolios Equity (more US mutual funds than US publicly-traded operating companies) • Growth • Large-cap • Small-cap • Index • Sector • International/global Debt • Long-term • Short-term • Money market (priced daily so # shares = # dollars) • Government • Tax-free municipal • Junk bonds QUESTIONS • What drives investor choice of funds? • How do MF investors allocate their investments? • How do MF investors re-allocate their investments? • Do mutual funds outperform the market (consider fees, expenses, taxes)?

  4. The mutual fund “gorilla” Size (equity and debt) • 2003 - $7,000 billion • 1999 - $5,500 billion • 1989 - $900 billion Percentage (US public equity market) • 2003 - 25.0%* • 2000 - 21.4% • 1995 - 14.6% • 1990 - 6.9% • 1985 - 5.3% • Under management – 33%

  5. How is mutual fund managed? Mutual fund adviser does it all • sets up fund (organized as corporation or business trust) • chooses investment style • puts in initial board of directors Directors (or trustees) are ostensible watchdogs • approves advisory contract • approves fees • supervises conflicts of interest Computation of value • Rule 22c-1: NAV at least once daily • industry practice: 4:00pm EST QUESTIONS: • Compare mutual fund to an operating corporation? • Do (should) MF directors function like corporate directors?

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