bài giảng investment analysis and management chapter 03

Indirect Investing

Chapter 3
Charles P. Jones, Investments: Analysis and
Management,
Tenth Edition, John Wiley & Sons
Prepared by
G.D. Koppenhaver, Iowa State University

3-1


Indirect Investing




Alternative to direct investment in or
ownership of securities
Refers to buying and selling the shares
of intermediaries that hold securities in
portfolio




Shares are ownership interest in portfolio
entitled to portfolio income
Shareholders also pay expenses

3-2

Investment Companies


Financial firm that sells shares to the
public and uses the proceeds to invest
in marketable securities






Acts as conduit for distribution of dividends,
interest, and realized gains
Can elect to pay no federal taxes on
distributions
Offers professional management

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Company Types


Unit investment trusts: Typically holds
an unmanaged, fixed-income portfolio





Assets not actively traded once purchased
Trust ceases to exist when securities
mature
Passive investment

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Company Types


Exchange Traded Funds: portfolio of
assets that offer diversification over a
sector, region, or market




Trade like individual equities on exchange
Management fees low
Investor controls realization of capital gains,
losses




Tax implications

ETFs on equities, bonds, commodities
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Company Types


Closed-end investment companies: No
additional shares sold after initial public
offering




Share prices determined and trade in a
secondary market
Price may not equal Net Asset Value of the
shares


Net Asset Value: Total market value of the
security portfolio divided by total shares

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Company Types


Open-end investment companies:
Shares continue to be sold to the public
at NAV after initial sale that capitalizes
the company





Shares may be sold back to company at
NAV
Company size constantly changes
Popularly called mutual funds

3-7


Mutual Fund Categories


Money market mutual funds invest in
portfolio of money market securities







Taxable or tax-exempt

Commercial paper important investment
Average maturity limit: 90 days
Investors pay a management fee but not a
sales or redemption charge (load)
Not insured by the federal government

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Mutual Fund Categories


Equity, bond, and income mutual funds
invest in portfolio of securities
consistent with the objectives of the
fund




Objectives set by the company’s board
Disclosure of objectives to investors
18 major categories of investment
objectives

3-9


Equity Funds




Most assets in equity funds rather than
bond or income funds
Most equity funds are either:




Value funds, which invest in undervalued
stocks as determined by fundamental
financial analysis
Growth funds, which invest in stocks of
firms expected to show future rapid
earnings growth
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Cost Considerations


Closed-end fund prices may be at a
discount or premium to NAV




Liquidation value different than price

“Load” funds charge a front-end fee to
cover the costs of selling the fund to
investors


May also be a redemption (back-end) fee or
distribution fee (called 12b-1 fee)

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Cost Considerations




All fees must be stated in the mutual
fund prospectus
No-load funds are purchased at NAV
directly from the investment company




No sales force expense to cover
Investors must seek out funds
Still an annual operating expense paid out
of fund income

3-12

Performance




Reported on a regular basis in the
popular press
Measured over a given time period as a
percent of initial investment




Total returns include reinvested dividends
and capital gains
Average annual return reflects the mean
compound growth rate of investment over a
given time period
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International Funds


Some mutual funds specialize in
international securities






US investors can participate in emerging
market economies
International funds or global funds
emphasize international stocks
Single-country funds concentrate assets


Actively or passively managed

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New Directions


Mutual fund “supermarkets”







Various mutual fund families can be
purchased through a single source
Brokerage account may provide access

“Supermarket” managers earn fee

Hedge Funds


Largely unregulated investment companies
available to private investors




May use leverage, strategies not available to
mutual fund managers
Substantial initial investment required

3-15


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