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Mutual Funds: An investment primer. What’s a mutual fund? Where do returns come from? Is there a strategy that works?. A pop quiz …. 4. Warren Buffet predicts that annual stock returns over the next 10 years will be: 6.5% 9.6% 12.3% 21.7%
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Mutual Funds:An investment primer What’s a mutual fund? Where do returns come from? Is there a strategy that works?
4. Warren Buffet predicts that annual 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 • 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
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: • 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, 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 (showing breakdown of expenses / fees / trading costs) 8. Mutual funds only impose a sales charge at the time you invest. • True • False 9. Rate that stock funds sell and replace stock (turnover) in their portfolios: • 6% • 56% • 90% • 153%
US Households (112 million) 55 million own mutual funds (90% have Internet access) On own 52% Retirement Account 48% 48% (IRAs) 52% (DC plans) 79% (broker) 29% (direct) Mutual funds ($9.5 T) Stocks 57% Bonds 17% Money Mkt 26% ICI 2005 – US Retirement Market ICI 2004 – US Household Ownership ICI 2001 – Profile of MF investors FR Boston – Oct 2006 Bogle – 60 Years Later (2005)
How a mutual fund works Fund investors Owners Elect majority ?? services fees Board of directors Mutual fund [portfolio] Management firm
Mutual fund – “tool of capitalism” “Capitalism ought to be about capturing the benefits of equity investment for those who put up the capital and take the risks.” Jack Bogle, founder of Vanguard
MF performance Mutual fund expenses = 2.5% Investor trading losses = 2.4%
MF performance $10,000 (10 years) = $28,651 $10,000 (10 years) = $22,819 $10,000 (10 years) = $18,249
Role of “independent” directors “When the managers care about fees and the directors don’t, guess who wins? Negotiating with oneself seldom produces a barroom brawl.” Warren Buffett Value investor who recommends that average investor “just index”
Some solutions … “I’m not your monkey.” Jon Stewart
The “agitated” mutual fund investor Actual includes “exchanges” within fund group.
Investor cognitive biases “If investors gobble up all the information that Lipper, Morningstar and publications like this newspaper lay before them, but still insist on ignoring fees and chasing the “hot” fund du jour, who’s to tell them they can’t?” Holman Jenkins Wall Street Journal Editorial - December, 2003
Some solutions … “I’m not your monkey.” Jon Stewart
