Exam 1 - Chapter 4 - [Slides] Flashcards
Investment companies
Pool money from individual investors and invest in a wide range of se unities or other assets
What are the services the increment companies provide?
- administration & record keeping
- Diversification & divisibility
- Professional management
- Reduced translation costs
Open end investment company
Investors can buy shares of a fund directly from investment company
- Fun issues new shares when investors buy4 in and redeem shared when investors cash out
- Price at Net Asset Value (NAV)
This type of managed investment companies is known to be
Open-end: _____
Mutual Funds
NAV formula =
Market value of Assets Minus liabilities
/
Shares outstanding
Mutual funds invest in what
- money market
- equity
- sector
- bond
- balanced
- asset allocation and flexible
- index
- international
What are the two types of investment
- Active management
2. Passively management
Active management:
Goal to be the market
Beat the S&P 500
Passively management
TRack the performance of designated index
Which one is more expensive active management or passively management
Active management
Mutual funds by investment Classification
- What % is Equity
54.2%
What are the 3 fee structure for cost of Investing in mutual funds
- Operating Expenses
- A commission or sales charge
- 12b-1 Charges
Operating expenses
Costs in operating portifolio
12b-1 Charges
Annual fees charged by mutual fund to pay for marketin/distribution costs
What are the 2 commission or sales charge
- Front-end load
2. Back-end load (Contingent deferred sales charge)
Does all mutual have the same fee structure
No share classes with different fee combinations
Remember front-end load and back-end loads
Front end: A front-end load is a commission or sales charge paid when you purchase the shares.
Back-end: A back-end load is a redemption, or “exit,” fee incurred when you sell your shares. Typically, funds that impose back-end loads start them at 5% or 6% and reduce them by one percentage point for every year the funds are left invested. Thus, an exit fee that starts at 6% would fall to 4% by the start of your third year. These charges are known more formally as “contingent deferred sales loads.”
Rate of return formula
NAV^1 - NAV^0 + Income and capital gain distributions
/
NAV ^0
NAV ^0 =
Initial NAV
NAV ^1 =
Ending NAV
Taxation of mutual fund income
Who is taxes are paid by
Investors
____ ____ do not control the timing of the sales of securities from the portfolio
Fund managers
High portfolio turnover leads to ___ ________
Tax inefficiency
What is the Average Turnover %
60%
Does the investment company pay taxes?
No, only the investors
What are the 4 types of Investment Companies
- Open-end investment company
- Closed-end investment company
- Unit Investment Trusts
Closed-End Investment Company
No change in shares outstanding; old investors cash out by selling to new investors
How is the Close-End Investment company priced?
Price at premium or discount to NAV
Unit Investment Trusts
- Fixed portfolio of assets with a definite life
- unmanaged
- Total assets have declined from $150 billion in 1990 to $29 billion in 2009
Are the unit investment trusts company fixed or constantly changing?
Fixed
What is a major benefit of investing in a unit investment trust?
It’s unmanaged so you don’t have to pay for that fee which can save u a lot of money
Other investment organizations
Commingled funds
REITS
Hedge Funds
Private Equity Funds
Commingled funds
Commingled funds are partnerships of investors that pool funds. The management firm that organizes the partnership, for example, a bank or insurance company, manages the funds for a fee.
REITs (Real Estate Investment Trust)
A REIT is similar to a closed-end fund. REITs invest in real estate or loans secured by real estate. Besides issuing shares, they raise capital by borrowing from banks and issuing bonds or mortgages. Most of them are highly leveraged, with a typical debt ratio of 70%.
What’s difference between mutual fund and hedge funds
Mutual funds - Invest in only one investment strategy
- They cant get loans to invest in
Hedge funds - Variety of different strategies
HEDGE FUNDS
Like mutual funds, hedge funds are vehicles that allow private investors to pool assets to be invested by a fund manager. Unlike mutual funds, however, hedge funds are commonly structured as private partnerships and thus are not subject to many SEC regulations.
Private Equity funds are short term or long term
Long term
Hedge funds are short term or long term
Short term
Private Equity Funds
Equity funds invest primarily in stock, although they may, at the portfolio manager’s discretion, also hold fixed-income or other types of securities. Equity funds commonly will hold a small fraction of total assets in money market securities to provide the liquidity necessary to meet potential redemption of shares.
Exchange Traded Funds
Potential advantages
Potential Advantages
- Trade Continuously like stocks
( Can be sold short or purchased on margin)
- Lower Costs (Often commission- free ETFs)
- Tax Efficient
Exchange Traded Funds
Potential disadvantages
- Prices can depart by small amounts from NAV
- Must be purchased from brokers for a management fee
Well known ETF Teacher wants us to know
Spiders
Diamonds
Cubes
What is spiders
S&P 500
What is Diamonds
Dow Jones Industrials
What is Cubes
NASDAQ 100
Performance of actively managed funds
Below the Wilshire index return in 23 of the 39 year as from 1971 to 2009
- Evidence for persistent superior performance (due to skill and not just good luck) is weak, but suggestive
- Bad performance more likely to persist
