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MUTUAL FUNDS OPERATION

MUTUAL FUNDS OPERATION. CHAPTER 23. INVESTMENT COMPANIES . Definition of an Investment Company;

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MUTUAL FUNDS OPERATION

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  1. MUTUAL FUNDS OPERATION CHAPTER 23 Dr David P Echevarria

  2. INVESTMENT COMPANIES • Definition of an Investment Company; A pool of funds belonging to individuals used to acquire a collection of individual securities such as stocks, bonds, or other publicly traded securities. The value of shares in the fund is determined daily by the Net Asset Value (NAV). • Management of Investment Companies • Portfolio Managers • Investment Analysts • Transfer Agent Dr David P Echevarria

  3. INVESTMENT COMPANIES • Types of Funds • Open-Ended • Investment pools which continue to take investor funds • Redemptions by fund at Net Asset Values (NAV) • Closed-End Funds • A one-time subscription. • Stock traded in secondary market; stock price typically < NAV • No redemptions by fund; if you want out, sell in market. (NYSE, AMEX) • Load vs. No-Load Open-End Funds • Exchange traded ETF • Hedge Funds Dr David P Echevarria

  4. INVESTMENT COMPANIES • Investment Company Portfolio Objectives • Common Stock Funds; • Growth, Income, G&I, International, Sector, Specialized • Balanced Funds; dividend paying stocks & bonds • Bond Funds, Money Market Fund, Real Estate Investment Trusts • Hedge Funds • Performance of Investment Companies • Sharpe Study; Excess Return per Unit of Risk • Few funds outperform the DJIA • Jensen Study; Examining intercept term (a) • alpha = abnormal return: Is alpha different from zero? • Results: funds earn 1.1% less per year given their level of risk • Carlson Study; three categories, none outperformed the S&P 500 Dr David P Echevarria

  5. INVESTMENT COMPANIES • Implications of Performance Studies • For market efficiency: you cannot beat the market • For active versus passive management • Risk reduction through diversification • The exception • Warren Buffet (Berkshire Hathaway) • Long-run average performance measurement bias Dr David P Echevarria

  6. REGULATION • SEC is principal oversight body • Investment Company Act (1940) is primary legislation as amended • 1993: Prospectus requires revealing names, etc., of managers. • 90% of income must be distributed to investors • Investment Advisor Act – must register if more than $25 million under management. Dr David P Echevarria

  7. HOMEWORK QUESTION • What important services do Investment Companies provide investors? • How do Open-end and Closed-end funds differ? • What is the advantage of a no-load fund? Advantage of a front-end load fund? • Why are there different types of funds? • How does the Sharpe Measure differ from the Jensen measure? • Overall, what is the verdict on Professional Fund Managers (in general)? Dr David P Echevarria

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