1 / 37

Mutual Fund Investors: Divergent Profiles

Mutual Fund Investors: Divergent Profiles. Alan Palmiter & Ahmed Taha Wake Law 01 Oct 07. A pop quiz …. 4. Warren Buffet predicts that annual US stock returns over the next 10 years will be: 6.5% 9.6% 12.3% 21.7% 5. Past performance of stock funds generally predicts future returns. Yes

dreama
Download Presentation

Mutual Fund Investors: Divergent Profiles

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. Mutual Fund Investors:Divergent Profiles Alan Palmiter & Ahmed Taha Wake Law 01 Oct 07

  2. A pop quiz …

  3. 4. Warren Buffet predicts that annual US stock returns over the next 10 years will be: • 6.5% • 9.6% • 12.3% • 21.7% • 5. Past performance of stock funds generally predicts future returns. • Yes • No • Only low-performing funds • Mutual fund investors say they pay attention more to fees than to performance. • True • False • Mutual funds are primarily owned by: • Individuals on their own • Individuals with retirement accounts • Institutional investors • Mutual funds mostly invest in: • Stocks • Bonds • Notes (money market) 3. What have been annual returns (1926-2004): • Small-cap stocks • Large-cap stocks • Corporate bonds • Treasury bills

  4. 10. What is a no-load fund? • An unleveraged fund • A fund without sales charges • A fund without trading costs • A fund without withdrawal fees • 11. Think about your own largest mutual fund. What is -- • Your current balance • Fund’s investment objectives • Fund’s sales charges, expense ratio, trading costs • Fund’s performance last year • 12. Consider your car/vehicle: • Its make, model, year • Its cost, MSRP, total miles, safety rating, gas efficiency • You get our point 7. As a mutual fund investor, you are entitled to: • Prospectus (before you invest) • Annual report (showing fund performance) • Statements (breakdown of expenses / fees / trading costs) 8. Mutual funds only impose a sales charge at the time you invest. • True • False 9. Annual rate that average stock fund sells and replaces stock (turnover) in its portfolio: • 6% • 56% • 90% • 153%

  5. US mutual fund market …

  6. US Households (112 million) Own mutual funds (55 million / 49%) Demand-side On own 46% Retirement account 54% Broker79% Direct29% IRAs48% DC plans52% Stocks 60% Mutual funds ($11.3 T) Bonds 17% Money Mkt 23% Fund Types

  7. Supply-side mutual fund market …

  8. Mutual fund market Next 15 groups (35%) Top 10 groups (38%) Rest (27%) Financial retirement market Mutual Funds (27%)

  9. Asset classes(risk/return primer)

  10. 12.7% Effect of investing $10,000 for 20 years … 3.7%

  11. Mutual fund investor profiles(demand-side)

  12. Industry profile

  13. ICI Investor Preferences (2006)

  14. ICI Investor Preferences (2006)

  15. “The 90 million fund shareholders’ demand for investment performance and services at a competitive level of fees and expenses continuously impacts mutual funds.” Paul Schott StevensICI President

  16. SEC portrait William O. Douglas: ”The investors’ advocate”

  17. Investors will benefit from a uniform fee table and management’s discussion of fund performance SEC (1983) The number/types of funds has proliferated, increasing need for information to help investors compare and contrast alternatives. SEC (Mar 29, 1995) Many investors find prospectuses “unintelligible, tedious, and legalistic” … Investors need to be provided with clear and comprehensible information. SEC (Feb 27, 1997) Funds may resort to advertising techniques that create unrealistic investor expectations. SEC (Mar 17, 2002)

  18. Prospectus VFINX • Disseminated • after investment / then once annually • Including electronically / filed SEC • Disclosure • Investment strategies • Risks (narrative) • Performance (1/5/10 years) • Expenses (sales charge, 12b-1 fees, mgmt fees) • Turnover rate • Effect • Omissions in fund literature not fraudulent, if info in prospectus Fund comparer (SEC website / NASD)

  19. Statement of Additional Information • Not disseminated • Available to investors (incorporated by ref into prospectus) / file SEC • No fraud liability if in SAI • Disclosure • Fund organization • Investment policies / limitations • Management of fund • Proxy voting policies • Financial statements • Can cover multiple funds Only disclosure of trading costs (brokerage commissions)

  20. Annual and semi-annual statements • Disseminated • Send semi-annually to all investors • Available on SEC website • Disclosure • Annually, MDFP (what’s affecting performance, line graph comparison to relevant index) • Financials (including expenses, turnover rate) • List of portfolio holdings (now summary of significant holdings, chart of category breakdown) Focus on performance, not expenses

  21. Advertising • Regulated • SEC Rule 482 – must state where can get prospectus • NASD Rule 2210 – must file with Advertising Reg Dept • Disclosure • Can include performance data (standardized format) • Info beyond prospectus • Required disclaimer • “Consider investment objectives, risks, charges, expenses” • “Past performance does not guarantee future results” No longer does info need to be from prospectus

  22. “The Commission should not be the arbiter of the appropriate level of fund fees. Whether fund fees are too high or too low is a question that we believe must be answered by competition in the marketplace, not by government intervention.” Arthur LevittSEC Chair (1993-2001)

  23. SEC attention to ICI, academic research …

  24. SEC citations (footnotes / rulemaking releases) * AARP survey of MF investors ** Textbook, Regulation of Investment Companies *** Articles/studies on trading abuses (finance journals, SSRN)

  25. “Academic” portrait How many colors do you see?

  26. Chase Returns Ignore Expenses (but not Loads) Ignorant of Objectives and Holdings Inattentive to Risk Behavior: Investors chase hottest funds Convex Flow-Return Relationship Reality: Little evidence of returns persistence: past returns generally don’t predict future returns Investors’ Behavior

  27. Chase Returns Ignore Expenses (but not Loads) Ignorant of Objectives and Holdings Inattentive to Risk Behavior: Expense level generally doesn’t affect fund choices More sensitive to loads Reality: Annual expenses greatly affect investors’ wealth Investors’ Behavior

  28. Value of $15,500 $336,730 Annual Return $232,104 $159.429 YEAR

  29. Chase Returns Ignore Expenses (but not Loads) Ignorant of Objectives and Holdings Inattentive to Risk Behavior: Most investors are unaware of their funds’ objectives or holdings Implication: Mismatch between investors’ objectives and funds’ objectives Investors’ Behavior

  30. Chase Returns Ignore Expenses (but not Loads) Ignorant of Objectives and Holdings Inattentive to Risk Behavior: Expense level generally doesn’t affect fund choices Implication: Mismatch between funds’ risk and investors’ risk tolerance Investors’ Behavior

  31. Modest proposals … (1) Point of sale disclosure (2) Post-purchase statements

  32. Fund XYZ performance Inv return Expenses/costs Net return 1-year 4.5% 2.1% 2.4% 5-years 7.6% 2.4% 5.2% 10-years 11.5% 1.9% 9.6% 20-years 8.9% 1.6% 7.3%

  33. Your fund has about average expenses, but 40% of other similar funds have lower expenses. You could be saving up to 2.2% on fund expenses. Your statement(Fund XYZ) Beginning balance $10,000 Investments $ 2,000 Withdrawals $ -- Investment return $ 850 7.7% Expenses Sales charge $ 60 0.5% Adm/advisory fees $ 140 1.3% Trading costs $ 80 0.7% TOTAL $ 280 2.5% Net return $ 570 5.2% Ending balance $12,570 Expenses (compare to other comparable funds) 66% - lower expenses 34% - higher expenses 0.3% 2.5% XYZ 6.3%

  34. The end

More Related