Chapter 4 (Mutual Funds) Flashcards
Closed-End Fund
Shares may not be redeemed, but instead are traded at prices that can differ from net asset value.
Exchange-Traded Funds (ETFs)
Offshoots of mutual funds that allow investors to trade index portfolios.
Funds of funds
Mutual funds that primarily invest in shares of other mutual funds.
Hedge Fund
A private investment pool, open to wealthy or institutional investors, that is exempt from SEC regulation and can therefore pursue more speculative policies than mutual funds.
Investment Companies
Financial intermediaries that invest the funds of individual investors in securities or other assets.
Load
A sales commission charged on a mutual fund.
Net Asset Value (NAV)
Assets minus liabilities expressed on a per-share basis.
Open-End Fund
A fund that issues or redeems its shares at net asset value.
Soft Dollars
The value of research services that brokerage houses provide “free of charge” in exchange for the investment manager’s business.
Turnover
The ratio of the trading activity of a portfolio to the assets of the portfolio.
12b-1 Fees
Annual fees charged by a mutual fund to pay for marketing and distribution costs
Unit Investment Trust
Money pooled from many investors that is invested in a portfolio fixed for the life of the fund.
Characteristics of a Closed-End Fund. 5
- Sold on primary market
- Fixed Amount of Shares
- Traded on secondary market
- Usually sold through brokers
- Premium/Discount of NAV
Characteristics of an Open-End Fund. 3
- Shares are bought directly from fund
- Redeem shares (@ NAV) from fund
- Pays redemption’s from cash
What are some of the Open-End Costs
- Fees from sales are called loads
- 12b-1 fees- marketing and distribution costs
- Management fees
- Operating expenses - record keeping, etc.
Real Estate Investment Trust (REITs)
Similar to a closed-end fund. Invests in real estate or loans secured by real estate.
- > 75% of income from real estate
- > 90% of income to fundholders
- High Dividend yields, but taxable
What do life cycle funds do?
- shift assets toward safety as retirement nears
- asset allocation changes as you age
- life cycle funds- diversified
Why invest in life cycle fund?
- time diversification
- diminishing human capital
- risk capacity reduces with age
What is Active Management?
- a fund where experts pick investments and charge fees
What is Passive Management?
- These funds are tied to an index (i.e. S&P 500), low fees
What are some things that ruin returns? 5
- Cash holdings
- Size
- Heavy Trading and Brokerage expenses
- Large Turnover and Redemption’s
- can be reduces through redemption fees - Poor investor Timing in Funds
What three Investment Styles are involved in the Morningstar Style Box?
- Value - as those with low ratios of market price per share to various measures of value.
- Blend-
- Growth- have high ratios, suggesting that investors in these firms must believe that the firm will experience rapid growth to justify the prices at which the stocks sell.
What do the three sizes for a morning star style box indicate?
- Large- represents the top 70% of capitalization in the market
- Mid - represents the next 20%
- Low - represents the remaining balance
What two dimensions are measured in the morningstar style box for a bond?
- Duration of the Bond
- Interest sensitivity
What are the load structures for “A” shares
- commission deducted from investment up-front
- Front-end Loads
- Lower *****
- Charged a .25% 12-B1 fee
What Type of Share Class has a back-end load?
“B” Class shares
What are some characteristics of “B” Class shares
- Reduced after each year held, then can convert to “A” share with a lower 12b-1 fee
- Often charged a 1% 12b-1 fee
Breakpoints
- For load mutual funds, the dollar amount for the purchase of the fund’s shares that qualifies the investor for a reduced sales charge (load). The purchase may either be made in a lump sum or by staggering payments within a prescribed period of time. The latter form of investment purchase in a fund must be documented by a letter of intent.
- For larger investments, “A” shares may be more beneficial
Characteristics of class “C” Shares. 4
- lower contingent deferred sales charge than class “B”
- No Front end load
- No Breakpoints, does NOT convert to “A” over time
- More expensive if held for long time-periods
What are “I” shares?
- Institutional Shares
- Carry no load for the most part
- little or no 12b-1 fees
- have a low expense ratio
What are some general tax rules of a mutual fund?
- Funds are not taxed if diversified and income distributed
- Investor tax on capital gain and dividend distribution
What is Portfolio Turnover?
The ratio of trading activity to assets of portfolio.
- This may effect investors tax liability
What are some of the benefits for ETF’s?
- Generally have lower fees and taxes than managed funds
- Can be traded just like a stock
- Traded in Secondary Market near NAV
- Buy on margin, sold short
What style of management do ETF’s use? (Passive or Active)
- ETF’s are Passively Managed
