1、CHAPTERFund Fund ManagementManagementnExplain the concept of mutual fund operationnExplain various types of mutual fundsnDescribe the various types of stock and bond mutual fundsnDescribe the characteristics of money market fundsnMutual funds offer a way for small investors to diversify when they co

2、uld not do so on their own with the purchases of individual stocksnComparison to depository institutionslLike depository institutions, mutual funds repackage proceeds from individuals to make investmentslBank deposits are a liability contract, but a mutual fund represents partial ownershiplNo federa

3、l insurance with mutual fund sharesnMutual funds adhere to a variety of federal and state regulationslSecurities and Exchange Commission (SEC) regulates lFunds must register and provide a prospectus to investorslDisclosure since 1993 of managers name and length of time employed in that positionnMutu

4、al fund itself is exempt from income taxation if fund distributes 90 percent of taxable incomenMutual fund prospectus information includes:lThe minimum amount of investment requiredlThe investment objective of the fundlThe return on the fund over the past year, the past three years and the the past

5、five yearslThe exposure of the fund to various types of risklServices the fund offersuCheck writinguTelephone or Internet funds transferlManagement fees incurred that investors pay nEstimating the net asset valuelNet asset value is the value per sharelEstimated dailyuDetermine the market value of al

6、l the securities in the funduAny interest or dividends added inuExpenses subtracteduDivide by the number of sharesuDividends lower NAVuNAV quotesMutual Fund Price AppreciationCapital Gains from the Sale of Securities in FundEarned Income from Dividends or Coupon PaymentsnMutual fund classifications

7、depend on the type of securities the fund invests in and can includelStock or equity mutual fundslBond mutual fundslMoney market mutual fundsnFamily of funds offered by investment companieslInvestor able to allocate then transfer funds among fundsStock Funds$3,962 billion57%Bond Funds$808 billion11%

8、Hybrid Funds$349 billion5%MoneyMarket Funds$1,845 billion27%nManagement of mutual fundslManagers invest in a portfolio of securities to meet the objectives of the fundlCover management costs with fees which are typically around one percent of total assets per yearlManagers adjust the composition of

9、their portfolios in response to market and economic conditionsnExpenseslFees include management plus record-keeping and clerical feeslExpense ratio = annual expenses/fund NAVlPassed on to investors since NAV is reduced by feeslInvestor should compare expense ratiosnActive marketing expenses and comp

10、ensation increases expenses12b-1 expensesnCorporate control by mutual fundslMutual funds are large shareholders in companies whose stock they holdlManagers may serve on the board of directors of companies in which the fund invests lCompanies try to satisfy mutual fund managers in order to keep them

11、from selling their stake in the firmnClassification refers to whether or not there is a sales chargenNo-load means funds are promoted, bought and sold directly via the mutual fundnLoad funds lPromoted by registered representatives of brokerage firms who get a commissionlInvestors pay the sales charg

12、el12b-1 expenses are “loads” used by no-load fundsnClosed-end fundslMutual fund does not repurchase the shares they sellsimilar to direct common stock investmentlInvestors must sell shares on an exchangelNumber of outstanding shares is constantlValue of shares related to expectations of portfolio an

13、d determined in marketnOpen-end “mutual” fundslWilling to repurchase investor shares at any timelNumber of shares outstanding does not remain constantlNAV determined by fund dailynGrowth funds for investors who want high returns with moderate risklMutual fund invests in companies that are expected t

14、o grow at a higher than average ratelGenerate an increase in investment value rather than steady incomenCapital appreciation or aggressive growth fundslHigh but unproven growth potential stockslHigher risknGrowth and income funds try to offer growth but with some stability of incomenInternational an

15、d global funds allow investment in foreign securities without the costs involved in purchasing and monitoring individual stockslReturns affected by stock priceslReturns also affected by foreign exchange ratesnA global mutual fund invests in some U.S. stocksnInternet funds focus on investments in Int

16、ernet companiesnSpecialty funds focus on a group of companies sharing a particular characteristicnIndex funds are designed to simply match the performance of an existing stock indexnMultifund funds invest in a portfolio of different mutual fundslMore diversified lInvolves higher expensesYear01000200

17、0300040005000600070008000Bond FundsStock Funds200119991995199019851978Year010002000300040005000Bond FundsStock Funds2000199919981997199619951994199319921991199019891988198719861985Common Stock$3,882 Billion76%Municipal Bond$269 Billion5%Long-Term U.S. Govt$309 Billion6%Cash$277 Billion5%Corporate Bo

18、nds$349 Billion7%Preferred Stock$28 Billion1%nRisks of bond fundslInterest rate risklCredit risknTax implications of bond fund investmentsnIncome bond funds vary in terms their exposure to credit risk and focus on periodic coupon payments and attract investors who arelInterested in periodic income s

19、ince prices are volatilelPlan to hold the fund long termnTax-free funds for high tax bracket investorsnHigh-yield or junk bond funds invest in bonds with a high risk of defaultnInternational and global bond funds lInternational bond funds contain bonds issued by governments or corporations from othe

20、r countrieslGlobal funds may contain both U.S. and foreign bondsnMaturity classificationslInterest rate sensitivity depends on the maturity of bondslFunds are typically segmented based on maturityuIntermediate-term funds invest in bonds with 5 to 10 years remaining to maturityuLong-term funds invest

21、 in maturities of 15 to 30 yearsnAsset allocation fundslFunds that contain a variety of investmentslComposition among stocks, bonds and money market securities is based on managers expectationsnVolume and mix in the kind of funds varies over timenOverall investment via mutual funds much higher in re

22、cent yearsnNew kinds of funds target customers with different risk preferencesnBoth investors and managers closely monitor performance as modeled by the equation below PERF = Performance SECTOR = Conditions in the funds sector Where: PERF= f ( MKT, SECTOR, MANAB) MKT = General stock market condition

23、s MANAB = The ability of the funds managementnChange in market conditionslClose relationship between performance and market conditionsnChange in sector conditionslDepends on the focus of the funduIndex fundsuAsian fundsnChange in management ability includes both managers skills and operating efficie

24、ncynPerformance of closed-end stock fundsl Driven by the same factors that influence open-ended fundslFixed supply of the funds shareslAdditional issuesuPerformance is affected by changes in the premium or discount relative to NAVuIf the funds premium increases relative to NAV, return to fund holder

25、s increasesnPerformance of bond mutual funds as shown in the model below PERF= f ( Rf, RP, CLASS, MANAB) PERF = Performance RP =Risk premium Where: Rf = Risk free interest rates CLASS =the classification of the bond fund MANAB = The ability of the bond funds managementnChange in the risk free ratelB

26、ond prices are inversely related to the risk- free ratelWhen rates decline, most bond funds perform wellnChange in the risk premiumlIf required risk premiums increase, bond prices falllLinked to economic condition:uRisk premiums increase in recessionsuRisk premiums decrease in boom times as investor

27、s buy riskier investmentsnImpact of the bond funds classificationlSome funds target a specific risk or maturitylClassification may have more impact than any other factornChange in management abilitiesnPerformance of closed-end bond funds is affected by all of the other factors and changes in the pre

28、mium or discountnInvestors should diversify among different kinds of funds to reduce volatilitynResearch on stock mutual fund performancelUsing return only is not valid lMutual funds typically do not outperform the marketlEvaluate mutual fund expensesnResearch on bond mutual fundslBond mutual funds

29、underperform bond indexeslInvestors should look for low expense bond fundsnMoney market funds are portfolios of short-term assetslCan include check-writing privileges for investorslNumber of checks per month may be restrictedlShareholders get periodic statementslLiquid, “cash” balance for investornA

30、sset composition of money market fundslIndividual funds concentrate in assets that reflect the funds objectivelMoney market securities of varying maturitynMaturity of money market fundslVaries over time with market conditonslRisk increases with termU.S. TreasurySecurities$91 billion6%Other$303 billi

31、on20%Commercial Paper$620 billion41%CDs$123 billion8%RepurchaseAgreements$186 billion12%Other U.S. Securities$189 billion13%nRisk of money market fundslCredit risk minimized by the short-term nature of maturitieslReturns for money market funds fall as interest rates in the economy falllExpected retu

32、rns are low relative to stock and bond fundsuConsistent positive returns over time uLower credit riskuLower interest rate risknManagement of money market fundslManagers try to maintain the overall objective of the fundlManage the composition of the assetslInvestors have a variety of choices when it comes to money market fundsnRegulation of money market fundslSecurities Act of 1933 requires that funds provide full information to investors via a prospectuslInvestment Company Act of 1940 contains restriction