©2003 McGraw-Hill Companies Inc. All rights reservedSlides by Kenneth StantonMcGraw Hill / Irwin
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5Chapter
The Financial Services Industry:
Mutual Funds
©2003 McGraw-Hill Companies Inc. All rights reservedSlides by Kenneth StantonMcGraw Hill / Irwin
5-2
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*
©2003 McGraw-Hill Companies Inc. All rights reservedSlides by Kenneth StantonMcGraw Hill / Irwin
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Mutual Funds
Open-ended Closed-end End of 2000:
• More than 7,100 stock and bonds mutual companies.
• Total assets of $5.12 trillion.• 8,200 firms and $6.97 trillion if money market
mutual funds included
©2003 McGraw-Hill Companies Inc. All rights reservedSlides by Kenneth StantonMcGraw Hill / Irwin
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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: $568.5 billion
» 2000: $5,120.0 billion.
©2003 McGraw-Hill Companies Inc. All rights reservedSlides by Kenneth StantonMcGraw Hill / Irwin
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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)
©2003 McGraw-Hill Companies Inc. All rights reservedSlides by Kenneth StantonMcGraw Hill / Irwin
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Types of Mutual Funds
Long-term funds (71.0% of assets, 2000)• Bond and income funds.• Equity funds.• Hybrid
Short-term funds (29.0% of assets, 2000)• Taxable and tax-exempt MMMFs• Generally higher returns than bank deposits but
uninsured.
©2003 McGraw-Hill Companies Inc. All rights reservedSlides by Kenneth StantonMcGraw Hill / Irwin
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Number of Mutual Funds
Year Equity Hybrid BondTaxable
MM
Tax-exempt
MM80 288 N/A 170 96 10
90 1,116 203 1,024 508 235
00 4,395 525 2,210 704 337
©2003 McGraw-Hill Companies Inc. All rights reservedSlides by Kenneth StantonMcGraw Hill / Irwin
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Overview of Mutual Funds
• Objectives (and adherence to stated objectives), rates of return and risk characteristics vary.
Examples:• Aggressive growth funds• Growth funds• Precious metals• World
©2003 McGraw-Hill Companies Inc. All rights reservedSlides by Kenneth StantonMcGraw Hill / Irwin
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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).
©2003 McGraw-Hill Companies Inc. All rights reservedSlides by Kenneth StantonMcGraw Hill / Irwin
5-10
Web Resources
For information on the performance of mutual funds, visit:
Morningstar www.morningstar.com
Web Surf
©2003 McGraw-Hill Companies Inc. All rights reservedSlides by Kenneth StantonMcGraw Hill / Irwin
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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.
©2003 McGraw-Hill Companies Inc. All rights reservedSlides by Kenneth StantonMcGraw Hill / Irwin
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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
©2003 McGraw-Hill Companies Inc. All rights reservedSlides by Kenneth StantonMcGraw Hill / Irwin
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Mutual Fund Share Quotes
Quotes include:• Fund name, Objective, Minimum investment
required, Asset size, Maximum initial and exit sales charges, Annual expenses, NAV, Dividends , Quarterly earnings,
One-through five-year rating (A through E).
©2003 McGraw-Hill Companies Inc. All rights reservedSlides by Kenneth StantonMcGraw Hill / Irwin
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Balance Sheet and Trends
Money Market Funds• Key assets are short-term securities (consistent with
deposit-like nature)» 2000: $1,303.9 billion (71.9% of total assets)
• Many have share values fixed at $1 and adjust number of shares owned by the investor.
©2003 McGraw-Hill Companies Inc. All rights reservedSlides by Kenneth StantonMcGraw Hill / Irwin
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Balance Sheet and Trends
Long-term Funds• Stocks comprise over 72.8 % of asset portfolios in
2000. • Shift to U.S. Treasuries, municipal bonds etc. when
equity markets not performing as well.
©2003 McGraw-Hill Companies Inc. All rights reservedSlides by Kenneth StantonMcGraw Hill / Irwin
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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.
©2003 McGraw-Hill Companies Inc. All rights reservedSlides by Kenneth StantonMcGraw Hill / Irwin
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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.
©2003 McGraw-Hill Companies Inc. All rights reservedSlides by Kenneth StantonMcGraw Hill / Irwin
5-18
Web Resources
For details of regulation of securities firms and investment banks, visit:
SEC: www.sec.gov
NASD: www.nasd.com
Web Surf
©2003 McGraw-Hill Companies Inc. All rights reservedSlides by Kenneth StantonMcGraw Hill / Irwin
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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 $4,833 trillion in 2000
» 200% growth compared to 340% in U.S.
• Larger returns in U.S.stock markets• Greatest development in countries with most
developed markets• Opportunities from declining Japanese markets
©2003 McGraw-Hill Companies Inc. All rights reservedSlides by Kenneth StantonMcGraw Hill / Irwin
5-20
Hedge Funds*
Not technically mutual funds• Not subject to SEC regulation• Organized as limited partnership• Common feature is use of leverage
High returns in 1990s Near collapse of Long-Term Capital
Management• $3.6 million bailout