Tài liệu Thị trường tài chính và các định chế tài chính_ Chapter 23 doc

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Chapter 23
Mutual Fund Operations
Financial Markets and Institutions, 7e, Jeff Madura
Copyright ©2006 by South-Western, a division of Thomson Learning. All rights reserved.
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Chapter Outline

Background on mutual funds

Stock mutual fund categories

Bond fund categories

Growth and size of mutual funds

Performance of mutual funds

Mutual fund scandals
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Chapter Outline (cont’d)

Money market funds

Hedge funds

Real estate investment trusts

Interaction with other financial institutions


Use of financial markets

Globalization through mutual funds
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Background on Mutual Funds

Mutual funds:

Serve as a financial intermediary by pooling investments by
individual investors and using the funds to accommodate
financing needs by governments and corporations in the
primary market

Frequently invest in securities in the secondary market

Provide an important service for individuals who wish to invest
funds and diversify

Offer liquidity if they are willing to repurchase an investor’s
shares upon request

Offer various different services, such as transfers between
funds and check-writing privileges
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Background on Mutual Funds
(cont’d)

A mutual fund hires portfolio managers to invest in a
portfolio of securities that satisfies the desires of investors


The portfolio composition is adjusted in response to changing
economic conditions

The board of directors:

Monitors management

Establishes procedures

Ensures that the fund is properly serving its shareholders

Under new SEC rules, a majority of board members must
be outsiders
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
Types of funds

Open-end funds:

Are open to investment from investors at any time

Allow investors to purchase or redeem shares at any time

Have a constantly changing number of shares

Maintain some cash in case redemptions exceed
investments

Consist of many different categories to satisfy investors’
investment needs

Background on Mutual Funds
(cont’d)
7

Types of funds (cont’d)

Closed-end funds:

Do not repurchase shares they sell

Require investors to sell the shares on a stock exchange

Have a constant number of outstanding shares

Have an asset size that is about 1/40
th
of the asset size of
open-end funds

Focus primarily on bonds and other debt securities
Background on Mutual Funds
(cont’d)
8

Types of funds (cont’d)

Exchange-traded funds:

Are designed to mimic particular stock indexes and are
traded on a stock exchange


Differ from open-end funds in that their shares are traded on
an exchange, and their share price changes throughout the
day

Consist of a fixed number of shares

Are not actively managed

Have become very popular in recent years

Typically do not have capital gains and losses that must be
distributed to shareholders
Background on Mutual Funds
(cont’d)
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
Types of funds (cont’d)

Hedge funds:

Sell shares to wealthy individuals and financial institutions
and use the proceeds to invest in securities

Differ from open-end funds because:

They require a much larger initial investment

They may not always accept additional investments or
accommodate redemption


They are unregulated and provide very limited information to
prospective investors

They invest in a wide variety of investments to achieve high
returns
Background on Mutual Funds
(cont’d)
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
Comparison to depository institutions

Mutual funds repackage the proceeds from individuals to make
various types of investments

Investing in mutual funds represents partial ownership

Investors share the gains or losses generated by the fund

Regulation and taxation

Mutual funds must register with the SEC and provide a
prospectus

Mutual funds are regulated by state laws

If a mutual fund distributes 90 percent or more of its taxable
income to shareholders, it is exempt from taxes on dividends,
interest, and capital gains
Background on Mutual Funds

(cont’d)
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
Information contained in a prospectus

The minimum amount of investment required

The investment objective

The return on the fund over the past year, the past
three years, and the past five years

The exposure of the fund to various types of risk

The services offered by the fund

The fees incurred by the find that are passed on to
investors
Background on Mutual Funds
(cont’d)
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
Estimating the net asset value

The net asset value (NAV) of a mutual fund indicates
the value per share

Estimated each day by determining the market value of all
securities comprising the fund, adding interest or dividends,
and subtracting expenses, then dividing by the number of

shares outstanding
Background on Mutual Funds
(cont’d)
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Computing the NAV
Philly Mutual Fund has 50 million shares issued to its
investors. It used the proceeds to buy stock in 100
different firms. These shares have a market value of
$100 million. In addition, Philly incurred $7,000 in
expenses today and collected interest and dividends
totaling $5,000. What is the net asset value per share?
$2.00
000/50,000,0$99,998,00
,000,000$7,000)/50-$5,000000($100,000,
shares of rfund/numbe of value Marketvalue asset Net
=
=
+=
=
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
Distributions to shareholders

Mutual funds generate returns to shareholders in three
ways:

They pass on earned income as dividend payments

They distribute capital gains resulting from the sale of
securities within the fund


Mutual fund share price appreciation

Mutual fund classifications

Stock mutual funds, bond mutual funds, or money
market mutual funds (see next slide)
Background on Mutual Funds
(cont’d)
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Background on Mutual Funds
(cont’d)
Distribution of Investment in Mutual Funds
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
Expenses incurred by shareholders

Mutual funds pass their expenses on to their
shareholders

Expenses can be compared among mutual funds by
comparing the expense ratio

Equal to annual expenses per share divided by the NAV

The higher the expense ratio, the lower the return for a given
level of performance

Mutual funds with lower expense ratios tend to outperform
others with similar objectives

Background on Mutual Funds
(cont’d)
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
Expenses incurred by shareholders (cont’d)

Expenses include:

Compensation to the portfolio managers and other
employees

Record-keeping and clerical fees

Marketing fees

12b-1 fees cover advertising expenses or compensate
brokerage firms that advised their clients to invest in that
fund
Background on Mutual Funds
(cont’d)
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
Sales load

Load funds have a sales charge

Promoted by brokerage firms who earn a sales charge
between 3 and 8.5 percent

Investors pay the sales charge through the difference

between the bid and ask prices of the load fund

Front-end load versus back-end load
Background on Mutual Funds
(cont’d)
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
Sales load (cont’d)

No-load funds are promoted strictly by the mutual
fund of concern

Preferred by investors who feel capable of making their own
investment decisions

Recently, some small no-load funds have become load
funds because they could not attract sufficient investors
Background on Mutual Funds
(cont’d)
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
12b-1 fees:

Were allowed in 1980 as distribution fees

Have sometimes been used by funds to pay a
commission to a broker whose clients invested in the
fund

May be charged instead or in addition to loads


Are subject to much controversy because many funds
do not specify how they use the money received
Background on Mutual Funds
(cont’d)
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
Corporate control by mutual funds

Large mutual funds can exert control over the
management of firms because they are commonly a
firm’s largest shareholders

e.g., Fidelity is the largest shareholder of more than 700
firms

Portfolio managers of many funds serve on the board
of directors of various firms

Many firms discuss any major policy changes with
analysts and portfolio managers of funds to convince
them that the change will have a favorable effect
Background on Mutual Funds
(cont’d)
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Stock Mutual Fund Categories

Growth funds are composed of stocks of maturing
companies that are expected to grow at a high rate


The primary objective is to increase investment value

Capital appreciation funds are composed of stocks that
have high growth potential but may be unproven

Suited to investors who are willing to risk a possible loss in
value

Growth and income funds provide potential for capital
appreciation with some stability in income
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Stock Mutual Fund Categories
(cont’d)

International and global funds

International funds invest in foreign securities

Returns on international funds are affected by the
foreign companies’ stock prices and the movements of
the currencies that denominate the stocks

Global funds include some U.S. stocks
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Stock Mutual Fund Categories
(cont’d)

Specialty funds focus on a group of companies
sharing a particular characteristic


e.g., energy or banking

Index funds are designed to match the
performance of an existing stock index

e.g., Vanguard 500

Multifund funds invest in a portfolio of different
mutual funds to achieve more diversification
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Bond Fund Categories

Income funds are composed of bonds that offer periodic
coupon payments and vary in exposure to risk

Corporate bonds are subject to credit risk, Treasury bonds are
not

Bonds backed by government agencies are less risky than
corporate bonds

Tax-free funds contain municipal bonds

Allows investors in high tax-brackets to avoid taxes while
maintaining a low degree of credit risk