CH 8 - Analyzing Mutual fund Securities Flashcards
four elements before selecting a suitable mutual fund
- People
- Philosophy
- Process
- Performance
good investment organizations should have two outstanding qualities of process:
- Elements that are verifiable and transparent.
2. Decision-making procedures that are team based.
What is growth at a reasonable price (GARP)?
A value approach to buying earnings growth`
Explain interest rate anticipation strategy
Moving between long-term government bonds and very short term Treasury bills (T-bills) based on a forecast of interest rates over a certain time horizon
What is style analysis?
the study of style drift in a fund’s holdings or returns over time
There are two methodologies to style analysis:
- Returns-based style analysis
* Holdings-based style analysis
Explain Holdings-based analysis
- Examines each stock in the portfolio and maps it to a style at a specific point in time.
- Style can be determined by capitalization, P/B, P/E, or dividend yield.
- Average of style of each stock taken into account and used to develop benchamrk
Example of Returns-based style analysis
a small-cap value fund’s composite benchmark could be 17% cash, 17% large-cap value, 11% small-cap growth, and merely 55% small-cap value.
Types of costs for Investor in a mutual fund
Implicit costs
Explicit Costs
3 categories of explicit costs
- management fees
- operating costs
- sales charges paid to the advisor
The magnitude of a given MER depends on three factors:
The type of assets the fund manages
The size of the fund
The manager of the fund
Example of implicit costs
Trading costs
2 ways an investor can avoid an unwarranted tax liability
- Avoid purchasing a fund close to its record date for distributions
- Sell the fund prior to the record date if the investor holds a capital gain
