Chapter 4 - mutual funds and other investment companies Flashcards
net asset value (NAV)
= (market value of assets - liabilities) / shares outstanding
unit investment trust
- Money pooled from many investors that are invested in a portfolio fixed for the life of the fund
- Management fees can be lower than those of managed funds
Redeemable trust certificates
shares or units
Open-end fund
ready to redeem or issue shares at their net asset value
closed-end fund
- do not redeem or issue shares
- however, you can sell shares to other investors
load
a sales charge
exchange-traded funds (ETFs)
Similar to an open-end mutual fund except for shares of ETFs are through brokers
commingled funds
- Partnerships of investors that pool funds
- The management firm that organizes the partnership, does so for a fee
- The fund offers units, which are bought and sold at NAV
commingled funds
- Partnerships of investors that pool funds
- The management firm that organizes the partnership, does so for a fee
- The fund offers units, which are bought and sold at NAV
Real Estate Investment Trusts (REITs)
Invest in real estate or loans secured by real estate
They raise capital by borrowing from banks and issuing bonds or mortgages
Most highly leveraged, with a typical debt ratio of 70%
equity REITs
invest in real estate directly
mortgage REITs
invest primarily in mortgage and construction loans
hedge funds
Allows private investors to pool assets to be invested by a fund manager
mutual fund
common name for an open-end investment company
money market funds
- Invest in money market securities such as T-bills, CP, repos, or CDs
- Average maturity is a little more than 1 month
- NAV is fixed at $1 per share
- So there are no capital gains or losses tax
government funds
holds short-term US treasury or agency securities and repos collateralized by such securities
prime funds
hold other money market securities such as CP or CDs
equity funds
- Invest primarily in stock, may hold fixed-income securities
- Commonly hold a small fraction of total assets in MM securities to provide liquidity for the redemption of shares
Income funds
tend to hold shares of firms with high div yields that provide high current income
growth funds
willing to forgo current income, focusing instead on the prospectus for capital gains
specialized sector funds
concentrate on a particular industry
bond funds
- Specialize in the fixed-income sector
- Further specialization e.x. Corporate, T, MBS, or muni bonds, or maturity
global funds
invest in securities worldwide
international fudns
invest in securities of firms located outside the US
regional funds
concentrate on a particular part of the world
emerging market funds
invest in companies of developing nations
balanced funds
Hold both equities and fixed-income securities in stable proportions
life-cycle funds
asset mix can range from aggressive to conservative
Static allocation life-cycle funds
maintain a stable mix across stocks and bonds
target-date funds
gradually become more conservative as time passes
funds of funds
mutual funds that invest in other mutual funds
Asset allocation and flexible funds
- May dramatically vary the proportions allocated to each market in accordance with the portfolio manager’s forecast of performance in each sector
- Engaged in market timing
index funds
try to match the performance of a broad market index
operating expenses
- the costs incurred by the mutual fund in operating the portfolio
- Include administrative expenses and advisory fees paid to the manager
- Typically range from 0.2% to 1.5%
- The expenses are periodically deducted from the assets of the fund
front end load
a commission or sales charge paid when you purchase the shares
low load funds
have loads that range up to 3% of invested funds
no load funds
have no front-end sales charges
back-end load
- a redemption, or “exit” fee incurred when you sell your shares
- Typically, funds that impose back-end loads reduce them by one percentage point for every year the funds are left invested
12B-1 charges
- SEC allows managers of 12b-1 funds to use fund assets to pay for distribution costs
- Advertising, promotional literature including annual reports and prospectuses, and commissions paid to brokers who sell the funds to investors
- Fees are deducted from the assets
- These fees are limited to 1% of a fund’s average net assets per year
RoR for fund =
= (NAV1 - NAV0 + income and capital gain distribution) / NAV0
soft dollars
- a PM earns soft-dollar credits with brokerage firms by directing the fund’s trades to that broker
- Based on those credits, the broker will pay for some of the mutual fund’s expenses
how does taxation work in mutual funds?
- Taxes are paid only by the investor in the mutual fund, not by the fund itself
- as long as: The fund is sufficiently diversified and virtually all income is distributed to shareholders
turnover
the ratio of the trading activity of a portfolio to the assets of the portfolio
Smart beta funds/actively managed ETFs
- Have other investment objectives other than tracking indexes
- Such as value, growth, dividend yield, liquidity, recent performance, or volatility
synthetic ETFs: Exchange-traded notes(ETNs)/ exchange-traded vehicles(ETVs)
- Nominally debt securities but with payoffs linked to the performance of an index
- Often an illiquid and thinly traded asset class
total return swap
with an investment bank in which the bank agrees to pay the ETF the return on the index in exchange for a relatively fixed fee
bank discount rate (T-bill quotes)
rBD = (10,000 - P) / 10,000 * (360 / n)
margin call occurs when:
- MV <= borrowed / (1 - MMR)
- equity / MV <= MMR
margin equity =
= position value - borrowing + additional cash
short sale equity =
= total margin account - market value
