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Chapter. 5. The Financial Services Industry: Mutual Funds. Overview. In this segment ... Mutual Funds: Activities of mutual funds Size, structure and composition Balance sheets and recent trends Regulation of mutual funds Global issues Hedge funds*. Mutual Funds. Open-ended Closed-end

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  1. Chapter 5 The Financial Services Industry: Mutual Funds

  2. Overview • In this segment ... Mutual Funds: • Activities of mutual funds • Size, structure and composition • Balance sheets and recent trends • Regulation of mutual funds • Global issues • Hedge funds*

  3. Mutual Funds • Open-ended • Closed-end • End of 2000: • More than 7,100 stock and bonds mutual companies. • Total assets of $5.12 trillion. • 8,200 firms and $6.97 trillion if money market mutual funds included

  4. Size, structure and composition • First mutual fund: Boston, 1924. • Slow growth, initially. • Advent of money market mutual funds, 1972. • Regulation Q. • Total assets in stock and bond mutual funds: • 1940: $0.4 billion. • 1990: $568.5 billion • 2000: $5,120.0 billion.

  5. Size, Structure and Composition • By asset size, mutual fund industry second most important FI group. • Recent inroads by commercial banks and insurance companies • Mellon purchase of Dreyfus • State Farm (9,000 agents)

  6. Types of Mutual Funds • Long-term funds (71.0% of assets, 2000) • Bond and income funds. • Equity funds. • Hybrid • Short-term funds (29.0% of assets, 2000) • Taxable and tax-exempt MMMFs • Generally higher returns than bank deposits but uninsured.

  7. Number of Mutual Funds

  8. Overview of Mutual Funds • Objectives (and adherence to stated objectives), rates of return and risk characteristics vary. • Examples: • Aggressive growth funds • Growth funds • Precious metals • World

  9. Returns to Mutual Funds • Income and dividends of underlying portfolio. • Capital gains on trades by mutual fund management. • Capital appreciation in values of assets held in the portfolio. • Marked-to-market. • Net-asset value (NAV).

  10. Web Resources • For information on the performance of mutual funds, visit: Morningstar www.morningstar.com Web Surf

  11. Types of Funds • Open-ended funds: contrast with most corporate securities traded on stock exchanges. • Closed-end investment companies: • Fixed number of shares • Example: REITs. • May trade at premium or discount. • Load versus no-load funds.

  12. Mutual Fund Costs • Two types of fees: • Sales loads • Generally, negative effect on performance outweighs benefits • Fund operating expenses • Management fee • 12b-1 fees

  13. Mutual Fund Share Quotes • Quotes include: • Fund name, Objective, Minimum investment required, Asset size, Maximum initial and exit sales charges, Annual expenses, NAV, Dividends , Quarterly earnings, One-through five-year rating (A through E).

  14. Balance Sheet and Trends • Money Market Funds • Key assets are short-term securities (consistent with deposit-like nature) • 2000: $1,303.9 billion (71.9% of total assets) • Many have share values fixed at $1 and adjust number of shares owned by the investor.

  15. Balance Sheet and Trends • Long-term Funds • Stocks comprise over 72.8 % of asset portfolios in 2000. • Shift to U.S. Treasuries, municipal bonds etc. when equity markets not performing as well.

  16. Regulation • One of the most closely regulated among non-depository FIs. • Primary regulator: SEC • Emphasis on full disclosure and anti-fraud measures to protect small investors. • NASD supervises mutual fund share distributions.

  17. Legislation • Securities Act 1933, 1934 • Investment Advisers Act, 1940. • Insider Trading and Securities Fraud Enforcement Act of 1988. • Market Reform Act of 1990 • Allows SEC to halt trading and introduce circuit breakers. • National Securities Markets Improvement Act of 1996. • Exempts mutual fund sellers from state securities regulatory oversight.

  18. Web Resources • For details of regulation of securities firms and investment banks, visit: SEC: www.sec.gov NASD: www.nasd.com Web Surf

  19. Global Issues • Worldwide growth in mutual fund investment not as great as in the U.S. • $1,626 trillion in 1992 to $4,833 trillion in 2000 • 200% growth compared to 340% in U.S. • Larger returns in U.S.stock markets • Greatest development in countries with most developed markets • Opportunities from declining Japanese markets

  20. Hedge Funds* • Not technically mutual funds • Not subject to SEC regulation • Organized as limited partnership • Common feature is use of leverage • High returns in 1990s • Near collapse of Long-Term Capital Management • $3.6 million bailout

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