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© 2006 The McGraw-Hill Companies, Inc., All Rights Reserved.
Mutual FundsMutual Funds
Chapter 5
K. R. Stanton
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Overview
In this segment ... Mutual Funds: Activities of mutual funds Size, structure and composition Balance sheets and recent trends Regulation of mutual funds Global issues Hedge funds*
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Mutual Funds
Open-ended Closed-end End of 2003:
More than 7,100 stock and bond mutual companies.
Total assets of $5.36 trillion. 8,200 firms and $7.41 trillion if money market
mutual funds included Slower rate of growth in the industry in early
2000s than in 1990s
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Size, structure and composition
First mutual fund: Boston, 1924. Slow growth, initially. Advent of money market mutual funds, 1972.
Regulation Q. Total assets in stock and bond mutual funds:
1940: $0.4 billion. 1990: $1,065.2 billion 2003: $7,414.1 billion.
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Size, Structure and Composition
By asset size, mutual fund industry second most important FI group.
Recent inroads by commercial banks and insurance companies
Mellon purchase of Dreyfus State Farm (9,000 agents) As of 2004, insurance companies managed
approximately 14% of mutual fund assets
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Types of Mutual Funds
Long-term funds 74.3% of assets, 1999 2002, long-term funds dropped to 62.1% of
assets, losing ground to MMMFs Types of Long-term Funds:
Bond and income funds. Equity funds. Hybrid.
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Types of Mutual Funds
Short-term funds 25.7% of assets, 1999. 30.2% of assets, 2002. Taxable and tax-exempt MMMFs Generally higher returns than bank deposits but
uninsured. Impact of low interest rates during early
2000s
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Number of Mutual Funds
Year
Equity
Hybrid
Bond
Taxable
MM
Tax-exempt
MM 1980 288 N/A 170 96 10
1990 1,099 193 1,046 506 235
2003 4,601 509 2,043 661 312
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Overview of Mutual Funds
Objectives (and adherence to stated objectives), rates of return and risk characteristics vary.
Examples: Capital appreciation funds Growth funds High-yield bond World equity Corporate bond
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Returns to Mutual Funds
Income and dividends of underlying portfolio. Capital gains on trades by mutual fund
management. Capital appreciation in values of assets held in
the portfolio. Marked-to-market. Net-asset value (NAV).
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Web Resources
For information on the performance of mutual funds, visit:
Morningstar www.morningstar.com
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Types of Funds
Open-ended funds: contrast with most corporate securities traded on stock exchanges.
Closed-end investment companies: Fixed number of shares
Example: REITs. May trade at premium or discount.
Load versus no-load funds.
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Mutual Fund Costs
Two types of fees: Sales loads
Generally, negative effect on performance outweighs benefits
Fund operating expenses Management fee 12b-1 fees
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Mutual Fund Share Quotes
Quotes include: Fund NAV, Fund name, Objective, one-month
through ten-year return and rating (A through E), Maximum initial charges, and Annual expenses.
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Balance Sheet and Trends
Money Market Funds Key assets are short-term securities (consistent
with deposit-like nature) 2003: $1,395.9 billion (69.2% of total assets)
Many have share values fixed at $1 and adjust number of shares owned by the investor.
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Balance Sheet and Trends
Long-term Funds Stocks comprised over 65.6 % of asset
portfolios in 2000. Credit market instruments 32.3% of asset
portfolios Shift to U.S. Treasuries, municipal bonds etc.
when equity markets not performing as well.
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Regulation
One of the most closely regulated among non-depository FIs.
Primary regulator: SEC Emphasis on full disclosure and anti-fraud measures
to protect small investors. NASD supervises mutual fund share distributions.
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Regulatory Changes
Prosecutions in light of trading abuses in early 2000s. Market timing Late trading Directed brokerage Improper fee assessments
Changes include: SEC requirements for independent board members; reporting and disclosure requirements
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Legislation
Securities Act 1933, 1934 Investment Advisers Act, 1940. Insider Trading and Securities Fraud
Enforcement Act of 1988. Market Reform Act of 1990
Allows SEC to halt trading and introduce circuit breakers.
National Securities Markets Improvement Act of 1996.
Exempts mutual fund sellers from state securities regulatory oversight.
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Pertinent Websites
American Banker www.americanbanker.com American Funds www.americanfunds.comFederal Reserve www.federalreserve.gov Fidelity Investments www.fidelity.comInvestment Company Institute www.ici.orgMorningstar, Inc. www.morningstar.com SEC: www.sec.govNASD: www.nasd.comVanguard www.vanguard.comWall Street Journal www.wsj.com
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Global Issues
Worldwide growth in mutual fund investment not as great as in the U.S. $1.626 trillion in 1992 to $6.543 trillion in 2003
Over 300% growth compared to 350% in U.S. Larger returns in U.S.stock markets Greatest development in countries with most
developed markets Opportunities from declining Japanese markets Efforts to reduce barriers for U.S. mutual fund
sponsors China and other Asian countries
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Hedge Funds*
Not technically mutual funds Not subject to SEC regulation Organized as limited partnership
Small number of sophisticated investors Common feature is use of leverage
High returns in 1990s
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Hedge Funds*
Near collapse of Long-Term Capital Management $3.6 billion bailout 2003 SEC scrutiny of hedge funds Scandals such as Canary Capital Partners
involving trades with mutual funds
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