IP - Chapter 12 - Investment Companies* Flashcards
What are the 4 basic types of investment companies?
1) UIT’s
2) Closed End Funds
3) ETF’s
4) Mutual Funds (Open End Funds)
Which type of investment company is the leader in funds invested?
Mutual Funds (Open End Investment Companies) (Specifically Equity Mutual Funds)
What is becoming a more common form of retirement plans with employers?
Defined Contribution Plans
Risk of outliving ones assets
Supperannuation
This rule allows companies to avoid taxation by becoming Registered Investment Companies and being able to distribute interest, dividends, and capital gains to shareholders.
Internal Revenue Code Section 851
What is the shareholders tax liability in a mutual fund?
Equal to their proportional ownership of the fund
Who are investment companies regulated by?
- SEC
- Investment Company Act of 1940
What are the requirements for an investment company to be considered tax exempt under IRS Code 851?
1) 90% of income must be generated for the RIC must be of income from: dividends, interest, and capital gains
2) At least 90% of taxable income must be distributed to shareholders
3) At least 50% of RIC total assets must be invested in either Cash, Cash Equivalents, or Securities
4) Total assets in RIC can not exceed 25% by any one issuer (unless issued by government)
3 facts about UIT’s?
1) Passively managed
2) Cash payments immediately passed through to investors
3) Offered through a one time public offering
Most commonly, traditional UIT’s solely invest in _________ .
Bonds (can also invest in equity securities)
How is maturity determined for UIT’s containing only fixed income?
Maturity date uses longest term bond
For UIT’s containing equity, when is maturity date determined?
At inception
3 facts about ETF’s?
1) Created through UIT’s (in creation units)
2) Passively Managed
3) Can be traded throughout the day
How do closed end funds raise capital?
IPO
A fund that divides its shareholders into two classes, one that is scheduled to receive dividend payments and one that is scheduled to receive capital gains. (This allows investors to select if they want price appreciation or income but not both).
Equity Dual Purpose Fund (CEF)
3 Facts about CEF’s (Closed End Funds)?
1) Raise capital through an IPO
2) Fixed Capitalization when funds are raised
3) Trade on an exchange and can be bought and sold throughout the day
What is FINRA’s limit to sales loads by %?
8.5% is max sales load
4 Facts about mutual funds?
1) Most common type of Investment company
2) Continually accept new capital
3) Valued daily according to NAV
4) NAV calculated at the end of every trading day
What is the formula for calculating NAV?
(Market Value of Assets - Market Value of Liabilities) / Total Outstanding Shares
For mutual funds (open end investment companies), at least how much of the funds board must be composed of independent directors?
40%
Included when purchasing a security and paid as part of original investment?
Front End Load
Charged not with the purchase but with the sale of the security. Most charge decreasing fee rate overtime, the longer security is held.
Back End Load
On a back-end loaded mutual fund, there is likely a 0% fee if the fund is held ___________ or longer.
5 years
What type of load is associated with an A-share?
Front End Load
What type of load is associated with an B-share?
Back End Load
The SEC limits redemption fees to _____ % in most situations.
2%
This fee discourages frequent trading by shareholders that might be disruptive to financial goals of the fund.
Redemption fee
Fee charged by a mutual fund company to pay for the services of the brokers who sell the mutual funds and who maintain the client relationships.
12b-1 fee
The 12b-1 distribution fee cannot exceed ______ % of NAV of shares
.75%
The 12b-1 service fee can not exceed _____ % of the NAV of shares.
.25%
Extra services included in commission fees charged by mutual funds like market research tools, etc.
Soft Dollars
Any fund that... - Charges a front end load - Charges a back end sales charge - Charges a 12b-1 fee exceeding .25% must \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_ .
Be advertised as a loaded fund
What are the two types of fees in a 12b-1 fee?
12b-1 distribution fee
12b-1 service fee
2 details about Class-B Shares?
- Most have ‘conversion feature’ to Class A after a specified period of time
- No breakpoints available
3 facts about Class-C shares?
- Backend load waived if held longer than 1 year
- No discounts, breakpoints, or conversions
- No front end loads
What are the time horizons for A, B, and C shares?
A shares: Long Term
B shares: Mid Term (5-7 years)
C shares: Short Term (1-2 years)
Securities that appreciate in value, are held and not sold tend to have large ______________ .
Built-in gains
2 downsides of mutual funds
- Often maintain large cash reserves for investors liquidating which often hinders performance
- Cannot be sold throughout the trading day
What are the 4 main types of Mutual Funds?
1) Money Market
2) Equity Funds (DOMINATE… over 1/2 of funds)
3) Fixed Income Funds
4) Hybrid Funds
Money market funds (3 key facts):
- Mature in a year or less
- Almost always trade at a discount
- Average maturity in fund must be 90 days or less
Examples of Money Market Mutual Funds include:
1) T-Bills ($100 minimum)
2) Commercial Paper ($100k minimum)
3) Bankers Acceptances
4) Negotiable CD’s ($100k minimum)
5) Repurchase Agreements
6) Short Term Municipal Debt
What kind of funds should investors be using in retirement accounts?
Taxable funds
Issued by governments, agencies or corporations that have maturity dates from 5 to 30 years
Fixed Income Securities
Funds that seek capital appreciation by investing in companies in related fields or specific industries?
Sector Funds
Funds that seek to provide capital appreciation while minimizing risk by employing long/short, market neutral, leveraged, or inverse strategies.
Alternative Strategy
Three types of ‘capital appreciation’ funds?
1) Growth
2) Sector
3) Alternative Strategy
Invest primarily in those companies that are out of favor with investors, appear underpriced by the market relative to their earnings/intrinsic value, or have high dividend yields.
Value Funds
Funds invest primarily in companies based in less developed countries?
Emerging Markets Funds
Funds invest primarily in equity securities traded worldwide, including equity securities of US companies
Global Equity Funds
These types of funds must invest in equity securities of companies located outside of the United States and cannot invest in US companies stocks.
International Equity Funds
Invest in companies that are based in a specific part of the world.
Regional Equity Funds
Invest in companies trading worldwide including companies based in the United States, specific regions, or emerging markets while employing long/short, market neutral , leveraged, or inverse strategies
Alternative Strategies World equity funds
Funds that seek high total return by investing in a mix of equities, fixed income securities, and money market instruments.
Asset Allocation Funds
These funds invest in a specific mix of equity securities and bonds with the objective of conserving principal, providing income, and achieving long term growth of both principal and income
Balanced Funds
Funds are designed to provide high total return by investing in common stock, bonds, other debt securities, and money market securities. The portfolio may hold up to 100% of any one of these types of securities and may easily change depending on market conditions.
Flexible Portfolio
Funds invest in a variety of income producing securities including equities of fixed income securities. They seek a high level of current income for shareholders. Capital appreciation is not a primary objective.
Income Mixed Funds
Funds that seek to provide capital appreciation while minimizing risk by investing in a mix of equity and fixed income securities while employing long/short, market neutral, leverage, inverse, or commodity strategies.
Alternative Strategies Funds
Funds that seek current income by investing in primarily investment grade securities. These funds may be short term, intermediate term, or long-term focused.
Investment Grade Funds
Funds that seek current income by investing two thirds of their portfolio or more in lower rated corporate bonds (Baa or lower by Moodys and BBB or lower by Standard and Poor’s rating services).
High Yield Funds
Funds pursue an objective of high current income by investing in taxable bonds issued or backed by the US government. Funds may be short, intermediate, or long term.
Government Bond
Funds that seek to provide high current income for the shareholders by investing predominantly in a combination of domestic fixed income securities, including mortgage backed securities and high yield bonds, and may invest up to 25% in bonds issued by foreign companies and governments.
Multi-sector Bond Fund
Funds that invest primarily in bonds of a single state or across various states. The bonds are exempt from federal income tax as well as state taxes for residents of that state.
Municipal Bond Funds
Unsystematic risk can be broken down into 3 risk categories, which are?
- Company Risk
- Concentration Risk
- Liquidity Risk
These funds have a balanced exposure to all types of mutual funds and invest in a combination of money market, fixed income, and equity securities.
Hybrid/Balanced Funds
3 most common traits of UIT’s?
- Fixed Capitalization
- Passive Management
- Fixed Termination Date
3 most common traits of ETFs?
- Passively Managed
- Index or Sector Exposure
- Inexpensive
3 common traits of CEFs?
- Funded through IPO
- Fixed number of shares
- Trade at discount or premium to NAV
Mutual funds are the most popular type of investment company in terms of assets under management and always trade at ______ .
NAV
Most mutual funds require a minimum investment of at least ___________ .
$1,000
Are there more mutual funs or individual stocks?
Mutual Funds
