Chapter 17: Analysis of managed and structured products Flashcards
What kind of product is Mutual fund?
managed product
What are the options for mandates of a fund?
- Active management (try to outperform a specific benchmark index)
- Passive management (try to replicate the returns of a market index. Assume only systematic risk associated with investing in a particular asset class)
What are the most common managed products?
Mutual fund, exchange traded fund (ETFs), segregated fund, hedge funds, listed private equity funds, closed-end funds, Labour-sponsored venture capital corporations (LSVCC)
What are the advantages of managed products?
- Professional management
- Economies of scale (power to negotiation of lower fees and transactions costs)
- Low cost diversification (which small investors can’t)
- Liquidity and flexibility (Some managed products can be bought or sold anytime)
- Tax benefits (some products like LSVCCs have tax benefits)
- Low cost investment options
What are the disadvantages of managed products?
- Lack of transparency
- Liquidity constraints
- High fees (Active fixed-income and foreign equity mutual funds can charge 2% to 5% in management fees. Some private equity funds and hedge funds typically charge a 20% performance fee)
- Volatility of returns
Where do Mutual funds’ objectives are stated?
In the Fund Facts document which discloses the degree of risk the fund is exposed to, main types of securities held in its portfolio, and the historical returns it earned…
How to calculate mutual funds’s units or shares?
Current offering price = net asset value per share (NAVPS) or net asset value per unit which depends on the market value of the fund’s portfolio
what should a mutual fund sales representative need to do?
They need to have a good understanding of the type and risk of each fund.
Know client’s risk tolerance and investment goals
Review the process and adjust it along with the change of investors and market.
Proper diversification for client’s portfolio should contain cash or near-cash investment, equity investment, and fixed-income investment.
What are the advantages of mutual funds?
- Low-cost professional management.
- Diversification (A large fund might have 60 to 100 or more different securities in 15 to 20 industries).
- Variety of types (ranging from fixed-income funds through to aggressive equity funds) and transferability of funds (Many funds allow transfer between funds managed by the same sponsor with little or no fee, or Transfers between different plans under the same fund)
- Flexible purchase and redemption options (can be one-time, lump-sum or pre-authorized contribution plan and the same with redemption)
- Liquidity (can redeem shares or units for cash at NAVPS, payments must within 2 business days)
- Ease on estate planning (Shares or units in a deceased person’s mutual fund continue to be professionally managed during the probate period: Cổ phần hoặc đơn vị trong quỹ tương hỗ của người đã qua đời tiếp tục được quản lý chuyên nghiệp trong thời gian chứng thực di chúc)
- Loan collateral and margin eligibility (Fund shares or units are usually accepted as security for a bank loan and margin purporse)
- Various special options (like reinvestment and contributions, regulatory filing, record-keeping like with income tax report)
What is regulatory filing in Mutual funds?
Mutual funds have to file many reports annually. Like:
- Annual information form (AIF)
- Audited annual and interim financial statements, and annual report.
Reports must be provided to unitholders or any person on request, can access through System for electronic document Analysis and Retrieval (SEDAR) website.
What are the disadvantages of mutual funds?
- Costs (front-end load along with management fee, or back-end load pay when you sell, or no-load funds)
- Short-term unsuitability (not apply for money market funds)
- Systematic risk
- Tax complications
What kind of structured can a mutual fund be?
As a trust or a corporation
What is the most common structure for mutual funds?
Is the unincorporated open-end-trust
What are the characteristics of a mutual fund that structured as an open-end trust?
- Can avoid taxation (Interest, dividends or capital gains income, net of fees and expenses, flows-through directly to the unitholders who will be taxed)
- The trust deed includes the fund’s principal investment objectives, investment policy, and any restrictions, also information about manager, distributor, and custodian)
- Right to redeem their unit at current NAVPS
- Holders may or may not have voting right.
- Have to hold a meeting for issues like changes in investment objectives, auditor or manager, or frequent decrease of NAVPS.
What are the characteristics of a mutual fund that structured as a corporation?
- Follow conditions of Income Tax Act
+Must mainly hold a diversified portfolio of securities.
+ The income must primarily from the interest and dividends paid out by these securities and any capital gains realized from these securities for a profit. - Investors in mutual fund corporations receive shares rather than units.
- lack the flow-through status of investment fund trusts.
- However, the corporation can achieve a virtually tax-free status by declaring dividends throughout the year that are equivalent to the corporation’s net income after fees and expenses. These dividends are then taxed on the shareholder.
What are the typical structure and organization of mutual funds?
they are directors, manager, distributors, and custodian
What is director and trustees in organization of a Mutual fund?
- hold the ultimate responsibility for ensuring that investments in the fund are consistent with the fund’s investment objectives.
- they may contract out the business of running the fund to an independent fund manager, a distributor, and a custodial organization (tổ chức trông coi).
What is the fund manager in organization structure of a Mutual fund?
- They provides day-to-day supervision of the fund’s investment portfolio.
- When trading, they must observe the guidelines specified in the fund’s own charter and prospectus, and constraints imposed by provincial securities commissions.
- The manager must also maintain a portion of fund assets in cash and short-term highly liquid investments productively -> they can redeem fund shares on demand, pay dividends, and make new portfolio purchases as opportunities arise.
- Managers also have the following responsibilities:
• Calculate the fund’s NAVPS
• Prepare the fund’s Fund Facts documents, simplified prospectus, and reports.
• Supervise shareholder or unitholder record-keeping
• Provide the custodian with documentation for the release of cash or securities. - The fund manager receives a management fee for these services, which accrues daily and is paid monthly. Fees are calculated as a percentage of the net asset value of the fund being managed
What are distributors in organization structure of a Mutual fund?
Mutual funds are sold by the following distributors:
• Investment advisors employed by securities firms
• A sales force employed by some organizations that control both management and distribution groups
• Independent direct sales organizations
• In-house distributors, including employees of trust companies, banks, or credit unions who have duties other than selling.
- They must explain the objectives and terms of various funds in language that is understandable to new. They also mail out confirmations of sales, handle client inquiries about features of the fund, and accept and transmit orders for fund share redemptions.
- In the process, they offer clients financial planning assistance that involves “know your client” and suitability standards. These standards are as important in mutual fund sales as they are in the general securities business.
As compensation for these services, the distributor usually receives a sales fee.
What is custodian in organization of a Mutual fund?
When a mutual fund is organized, an independent financial organization, usually a trust company, is appointed as the fund’s custodian. The custodian collects money received from the fund’s buyers and from portfolio income, and arranges for cash distributions
through dividend payments, portfolio purchases, and share redemptions.
Sometimes the custodian also serves as the fund’s registrar and transfer agent, maintaining records of who owns the fund’s shares. This duty is complicated by the
fact that the number of outstanding shares is continually changing through sales and redemptions. Fractional share purchases and dividend reinvestment plans further
complicate this task.
How are mutual fund shares purchased or sold?
directly with the fund
What should the purchaser receive before purchasing any mutual fund share/unit?
Fund fact document
At which price will the investor pay for share/unit of mutual fund?
based on NAVPS at the close of business on the day the order was placed (also the redemption price) (there’s might be commission on top of that)
What is NAVPS?
is the theoretical amount that a fund’s shareholders would receive for each share if the fund were to sell all its portfolio of investment at the market value, collect all receivables, pay all liabilities and distribute what is left to its shareholders.
How to calculate NAVPS?
= (Total Assets - Total Liabilities) / total number of Shares or Unites outstanding.
How is an order from an investor processed?
- Order from investor -> mutual fund representative -> transmit to the principal office of the mutual fund on the same day.
- Payment for purchases is usually made in advance, payment for redeemed must be made within 2 business days after the NAVPS is determined.
How often the mutual funds calculate NAVPS?
- varies but at least once a week. (most large fund calculate every day after market close).
- If a fund compute NAVPS less frequently than daily, sales and redemptions are made at the next valuation date.
- If computed monthly, redemption must be submitted up to 10 days before the computation.
- One exception to these rules is real estate funds. They must compute at least once a year, although most funds make the calculation on a quarterly basis
What are the factors affecting the sale charge?
- Type of fund
- Its sponsor and method of distribution
- The amount of money being invested
- The method of purchase (lump sum vs contractual purchases spread out over a period of time).
What is the characteristic of front-end sale charges?
- Vary from firm to firm because they are set by the distributors -> negotiable.
- Usually % of purchase price, % reduces as the amount of purchase increases.
- Front-end load takes fee directly from the actual amount invested -> the offering price > NAVPS. Regulations require that front-end loads be disclosed in the prospectus, both as a percentage of the purchase amount and as a percentage of the net amount invested.
What is the characteristic of back-end (defferred sales charge) sale charges?
- set by dealer and are not negotiable.
- the fee might base on the original contribution to the fund or on the asset value at the time of redemption.
- In most cases, the charges decrease the longer the investor holds the fund.
What is the characteristic of no-load fund?
no sale charges however, some self-directed brokers levy (thu phí) modest administration fees. The funds also charge some management fees and other administrative fees.
Which organization have developed an online tool to calculate the impact of the various types of fees on mutual funds?
The Ontario Securities Commission and the Department of Innovation, Science and Economic Development Canada (ISED)
How to calculate a front-end load fee?
offering price = NAVPS / (100% - sale charge %)
What is trailer fees (service fee)?
- The annual trailer fee the fund pay to sales representative as long as the client holds the funds. (provides ongoing services to investors, including investment advice, tax guidance, and financial statements)
- Usually paid out of the fund manager’s management fee.
What are other fees when investing in Mutual fund?
- Some funds charge set-up fee
- Some no-load funds charge early redemption fee if redeem within 90 days of the initial purchase. Could be flat fee of $100 or 2%.
What is switching fees?
- Fee apply when exchange units of one fund for another in the same family or fund company.
- Some fund companies allow unlimited free switches between funds, others allow a certain number of switches before fee are applied.
- Negotiable fee to maximum 2% of the amount being transferred, some just waive this fee.
- Not apply in case the fund mergers or terminate. In such cases, it is allowed to transfer to existing fund or withdraw the cash value.
What are the factors affecting management fees?
depends on type of fund, particularly on the level of service required to manage the fund.
How different is the management fees between different types of funds?
- Money market funds: low (0.5%-1%)
- Equity funds: higher (except index funds), ranging from 2-3% or higher
- Index funds: usually lower than equity funds
Where are the management fees outlined?
in the prospectus. Fee can be based on the average daily net asset. (not great because reward not on the performance of the fund)
What are the fee that charged directly to the fund, not included in management fee?
- Interest charge
- Taxes, audit, and legal fees
- Safekeeping and custodial fees
- Provision of information to share or unitholders.
What is management expense ratio (MER)?
- represents the total of all management fees and other expenses charged to a fund by a percentage of the fund’s average net asset value for the year.
- Trading or brokerage costs are excluded from the MER because they are included in the cost of purchasing or selling portfolio assets.
How to calculate the MER?
MER = Aggregate fees and expenses payable during the year / average net asset value for the year *100%
Does the published rates of return on mutual funds include MER?
No, it calculated after deducting MER. The NAVPS also calculated after the management fee has been deducted.
By law, funds must disclose in the fund prospectus both the management fee and MER for the last how many year?
5 years
What is F-class fund?
- type of fee-based fund NOT commission-based with a lower MER.
- Client is charged a % of the assets under management, rather than a commission or fee for each transaction.
- Reduce the double charge (in the past, client were charged an MER that included compensation to the sale representative)
what are the three broad principles that securities regulations related to mutual funds based?
personal trust, disclosure, and regulation.
What are the five standards of conduct that rules and regulations can be distilled?
- Duty of care
- Integrity
- Professionalism
- Compliance
- Confidentiality
What is duty of care about?
- You must conduct due diligence before providing advice or recommending products.
- Must understand your clients’ needs, goals, and risk tolerance
- You must learn about the products you sell and make sure your recommendations suit each client’s situation
