Module 10 Funds

1. Module 10Funds

2. Module 10 Learning Objectives • Define fund, fund portfolio and net asset value. • Differentiate between mutual funds, closed-end funds, and unit trusts. • Define fund objective. • Define fund family. • Explain what a exchange-traded fund is. • Differentiate between actively managed and index funds. • Evaluate funds based on: • Performance • Fund size and fund age • Portfolio manager • Fees and expenses • Portfolio • Risk and market correlation measures • Download fund information from fund rating services and evaluate.

3. Test your knowledge • What exactly is a fund? What can it invest in? • How many funds are there? • How many people invest in funds? • Since 1980, has the amount people invest in funds grown 3 times? 4 times? 5 times? • What is the typical balance that the individual has invested in funds?

4. Mutual fund industry

5. Why Invest In Funds? • Professional management • Diversify with relatively little money • Small investments (minimum $250) • Invest internationally

6. Check out current returns • Go to Morningstar.com and click on Funds • Check out category returns (link of right side of page) • Which funds have done the best?

7. Mutual Funds • As of beginning of 2001, 8700 mutual funds worth $7 T • Number of shares can grow or contract depending on whether investors buy or sell the fund • Fund can become too large • Manager at the mercy of redemptions

8. Closed-end Funds • 470 closed-end funds with $160 B • 60% bond funds • Number of shares don’t change • Manager can manage without worrying about redemptions • Market value may be different from Net Asset Value • Most have mutual fund equivalents

9. Unit Trusts • Number of shares don’t change • Investments don’t change • Natural for bonds-hold until maturity • May involve a selection of stocks around a theme (broad-based index, sector or international) • Many are traded on AMEX as ETFs

10. Check the performance of the following funds. Is the closed-end or mutual fund the better way to go? • Templeton Emerging Markets (EMF) and Templeton Institutional Emerging Markets (TEEMX) are managed by the same fund family. • Gabelli Asset (GAB) and Gabelli Equity (GABAX) are managed by the same fund family.

11. Fund Objective

13. Check to see if the fund’s portfolio matches what you think the fund’s objective is. Use www.morningstar.com: • Royce Premier (Small Cap) RYPRX • American Century International (International) TWGAX • CGM Focus (MidCap) CGMFX • Oakmark (Value) OAKLX

15. Buying Mutual Funds

17. Fund Fees • Included in expense ratio • Investment advisory or management fees - 0.5% to 1% • Administrative fees 0.2% to 0.4% • 12b-1 fees (marketing) - maximum of 1% • Not included in expense ratio • Sales loads (up to 8.5% allowed) • Transaction or redemption fees (up to 2%) • Maintenance fee (for small accounts - $10 to $30)

18. What is the effect of sales charges and expense levels on your mutual fund performance? Here are 3 international funds. Use the SEC mutual fund calculator to figure out what these charges are costing you. Assume that you invest $10,000 and all 3 funds will return 10% annually. Go to Interactive Tools at www.sec.gov. Select mutual fund calculator. Hint: You need to fill in the boxes even if there are zeros already in place.

19. Buying Closed-end Funds

20. Check these out • Templeton Russia, an emerging market equity fund, was selling at $11.70 per share at the beginning of 2001. Its net asset value was $13.84 per share. Calculate if it was selling at a discount or premium to net asset value. • Gabelli Utlility, a specialized equity fund, was selling at $8.75 per share at the beginning of 2001. Its net asset value was $7.74 per share. Calculate if it was selling at a discount or premium to net asset value. • Go to www.morningstar.com and check out these funds now.

21. Buying Exchange-traded Funds

22. Are ETFs really lower cost? • The Financial SPDR (XLF) had a 2000 return of 25%. Its expense ratio was 0.28%. The NAV of the fund was $700,248,000 at the beginning of 2001. There were 26,850,000 shares and the market price was $26.54. • Calculate the market value of this fund. • Do ETFs trade closer to NAV than closed-end funds? • Do they have lower expense ratios?

24. Actively managed fund performance Actively managed funds do better during good times when chances of choosing winner is high. Not good during transition periods (down to up or up to down) Index funds do better when large cap stocks are in favor.

25. Evaluating funds • Objective • Relates to your asset allocation goals • Check the portfolio to be sure • Fees • The lower the better – check against index funds • Performance • How does it do against the index? How does it do against other funds? • Risk • Is it lower risk than other funds? • Management • If you are choosing an actively-managed fund – how experienced is the manager? • www.morningstar.com or www.marketwatch.com for Lipper

26. www.morningstar.com

37. Other American Funds Have sales fees

39. Fund FeesTrue or False? • All fund fees are charged when you buy. • All fund fees have the same effect. • A no-load fund has no fees. • All funds should have the same level of fees and expense ratios. • Expense ratios are such a small part of your investment you shouldn’t worry about them.

40. Evaluate your fund performance/fees against index funds performance/fees

41. How fees (negatively) impact your return Source: Statement of John C. Bogle to the United States Senate Governmental Affairs Subcommittee, November 3, 2003

42. The bigger, the not-better Source: Statement of John C. Bogle to the United States Senate Governmental Affairs Subcommittee, November 3, 2003

43. Investors hold funds for 3 years Source: Statement of John C. Bogle to the United States Senate Governmental Affairs Subcommittee, November 3, 2003

44. Beating the indices -- negatively Source: Statement of John C. Bogle to the United States Senate Governmental Affairs Subcommittee, November 3, 2003

45. Evaluate - Fund ObjectiveTrue or False? • There is a rich menu of fund objectives to choose from • You don’t need to understand the asset class • Funds need to invest 100% of their investments in the stated objective • Just about all funds follow their fund objectives

46. Evaluate Fund Objectives • A major portion of your portfolio is in the S&P 500. Your goal is to diversify to investments outside the U.S. Look up the following international funds. Evaluate each in terms of your objective. Do they qualify? Explain why or why not. • Janus Worldwide • Fidelity Overseas

47. Evaluate -Fund PerformanceTrue or False? • Last 12 months is the best way to measure fund performance • Raw performance numbers are not the best method to evaluate funds • You can’t use the S&P 500 to evaluate a hybrid fund • The “Best Pick” list of any financial magazine is a good way to choose funds

48. These are funds from Forbes’ best picks for 1998. How did they do in 2000? Check out Morningstar.com. Look up the fund and check its one-year performance and rank in its fund group. • Vanguard Windsor II VWNFX • T Rowe Price Capital Appreciation PRWCX • Safeco Equity Fund SAFQX • Scudder Growth and Income Fund SCDGX

49. Evaluate Fund PerformanceThese are the top 4 funds of 1999. Would they have been a good investments? What category are these funds in? How is did they perform? • Nicholas-Applegate Global Tech I NGTIX • Warburg Pincus Advisor Japan Small Company • Van Wagoner Emerging Growth VWEGX • Nevis Fund NEVIX

50. Fund Size and Fund Age