Lesson 4: Investment Companies Flashcards
Face-Amount Certificates (FAC)
Only really need to know that they are a type of Investment Company
Investment Companies
Started with the Investment Co Act of 1940 that allowed people to invest in a company, who then managed those investments and diversified for the customer
Their goal is to poo money from investors and deploy it based on a specific investment goal
Management Companies
Unit Investment Trusts (UITs)
Holds a fixed portfolio
- they sell redeemable shares or “units” to investors on an IPO (no 2nd market)
- passively managed/supervised (no active trading)
- generally either a pf of bonds or tracking an index
- no reinvestments, pf income distributed to investors
- On maturity date, remaining securities are liquidated and distributed to investors
Redeemable, Passive
Open Ended Funds (Mutual Funds)
- actively manage portfolios
- unlimited number of shares
- continually offer new shares to raise capital
- no real secondary market, all purchases/redemptions are with the fund itself
- prices are buy at POP (NAV + SC), sell at (NAV)
- MF orders are executed using forward pricing
Redeemable, Actively managed
Forward Pricing
MF Orders are filled at a price based on the next calculated NAV
Closed End Funds
- actively manage portfolios
- fixed number of shares
- only one IPO
- shares are traded on exchanges or OTC
- share prices are determined via supply & demand on the open market
Exchange-traded, actively managed
Exchange Traded Funds (ETFs)
- passively managed, tracking an index
- trade intra day in the market
Exchange-traded, passive
POP
Public Offer Price
= NAV + SC
SC
Sales charge (in reference to open ended mutual funds)
Ways to reduce:
- breakpoints: reduced SC for larger investments
- Letters of Intent: Achieve a breakpoint over time (over up to 13 months)
- Rights of Accumulation: use share appreciation or aggregate investments to reach a breakpoint
NAV
Net Asset Value
- because underlying asset values change, the NAV of the fund changes every day (see slide 99 for ex)
- per share NAV = NAV/Shares outstanding
No-Load Fund
Fund with no sales charge
- still have expense ratios
Rights of Accumulation
- reduced sales charged based on share appreciation and aggregate holdings
- can be shared with immediate family members
- can include aggregate holdings in different accounts owned by the same investor
Mutual Fund Expense Ratio
Annual Fees to run the fund
- management fees (typically the largest fees) pay for the funds PM
- 12b-1 fees pay for marketing & shareholder services
- Other: pays for misc costs outside 12-1 fees
- calculation; operating expenses/avg value of fund assets
Money Market Mutual Fund
Goal is to maintain a NAV of $1 per share, but it can fluctuate
Reconstitution
The process of updating a passive ETF portfolio as companies are added/removed from the underlying index
Redeemable
Funds that are redeemable mean that there is no secondary market, you must go through the fund to buy/sell shares
Summary Prospectus
- includes highlights + important info from full prospectus
- if provided, must be delivered to investors by time of sale
- if provided, full prospectus must also be made available
- not all investment companies must provide one (only mutual funds)
Custodian
Party responsible for holding/safekeeping a mutual funds cash and securities
