Investment Companies (Lesson 7) Flashcards
What are three types of investment companies
- Closed End
- Open End
- Unit Investment Trust (UIT)
What are closed end funds
- have a fixed initial market capitalization because a specific number of shares are initially sold to the public
- No new shares are issued
- Shares may trade at a premium or discount to net asset value
What are open end funds
- have an unlimited number or shares
- As long as an open end fund receives contributions the fund family will continue to issue shares
- Shares trade at Net Asset Value
What is the Net Asset Value Formula
- NAV = (Assets - Liabilities) / Shares Outstanding
What are unit investment trusts
- Can be equity or fixed income unit investment trust
- Managed by a Trustee there is no investment manager
- Are self liquidating, passive management and no trading of assets within the trust
- issue units not shares
- Units can be sold back to the UIT at NPV
(Types of Mutual Funds)
Aggressive growth
- invests in small caps and offers the greatest potential for capital appreciation
(Types of Mutual Funds)
Growth
- invests in equities that have a high P/E
- little to no dividends
- are growing earnings and revenue rapidly
(Types of Mutual Funds)
Growth and Income
- Invests in equities and income producing assets
- Primary objective is to provide capital appreciation and income
(Types of Mutual Funds)
Value Fund
- invests in undervalued funds that have a low P/E
- high dividend yields
- positive future outlook
(Types of Mutual Funds)
Balanced Fund
- Invests in more bonds than a typical equity fund
- seeks well balanced return in the form of both income and capital appreciation
(Types of Mutual Funds)
Bond Fund
- Provides investors with a liquid bond investment that is cost effective and fairly conservative
(Types of Mutual Funds)
Money Market Funds
- Highly liquid
- appropriate for an emergency fund
- invests in securities with maturities of less than 90 days
(Types of Mutual Funds)
Index Funds
- Tracks the performance of various market indices
- passive investment strategy that are tax efficient
- low turnover rates which minimizes capital gains distributions
(Types of Mutual Funds)
Sector Funds
- invest in sectors of the US economy
- not well diversified
- have a low r squared (0.50-0.60)
(Types of Mutual Funds)
Asset allocation funds or Lifecycle funds
- Well diversified portfolios including stock, fixed income, international, and money market securities
- allocation changes as investor gets closer to retirement
(Types of Mutual Funds)
Global Funds
- Invest in international and US securities
(Types of Mutual Funds)
International Funds
- Invests only in international securities and excludes US securities
(Fund Expenses)
No Load Funds
- do not charge a sales commission when purchased or redeemed
(Fund Expenses)
Load Funds
- charge a sales commission when purchased or redeemed
- Ex: A Shares, B Shares, C Shares
(Fund Expenses)
A Shares
- Have a front end load (Up front sales commission)
- Small 12b-1 fee (marketing fee)
- No redemption fee or back end load
- appropriate for long term investors because of the low 12b-1 fee
(Fund Expenses)
B Shares
- contain a back end sales load (redemption fee)
- High 12b-1 fee (the maximum of 1%)
- do not have front end sales load
- can be converted into A shares
- many funds no longer offer B shares
(Fund Expenses)
C Shares
- do not charge a front end load
- usually charge a small back end load and charge the maximum 12b-1 fee of 1%
- usually appropriate for short term investors
- do not convert to A shares
What are Exchange Traded Funds (ETFs)
- portfolio of stocks that represent an index
- can be traded intraday
- most are tax efficient and passive investments
- can be either actively and passively managed
What are Real Estate Investment Trusts (REITs)
- have low correlation with the stock market and the diversification benefit that they provide a portfolios
- real estate is a hedge against inflation
- must distribute 90% of investment income to shareholders to maintain tax exempt status
What are the three types of REITs
- Equity
- Mortgage
- Hybrid
What is an equity REIT
- invest in real estate for capital appreciation
- income is generated from rental income and appreciation
What is a mortgage REIT
- invest mostly in mortgages and construction loans
- make the spread between the lending and borrowing rate
What is a Hybrid REIT
- Combo of both equity and mortgage
What is an American Depository Receipts (ADRs)
- Used to trade foreign securities in US markets
- represent foreign stock held in domestic banks foreign branch
- entitle the shareholder to dividends and capital gains
- trade on US exchanges and are denominated in US dollars and trade in US dollars
- dividends are paid in US dollars
What is a capital gain in an ADR
- currency fluctuation
What risk do ADRs not eliminate
- Exchange rate risk
What currency are ADRs denominated in and what currency are their dividends paid in
- US Currency
Any asset that does not fit into cash, equities, or bonds is considered
- alternative investments
What are characteristics of alternative investments
- not for the average investor
- typically high risk, large minimum purchase, and high fees
- Actively managed and may use leverage
- Very low liquidity
What are common alternative investments
- hedge funds
- collectibles
- precious metals
- CMOs
- LPs
- REITs
