Investment Companies

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					                                           Investment Companies
In 1992 for first time in U.S. financial history, individuals no longer held a majority of all publicly traded U.S.
stocks. However, if one counts indirect ownership, the individual investor controls more than 50% of the stock.
Assets in mutual funds grew by more than tenfold in the 1980s to $1 trillion dollars and by June 1999 $6 trillion
dollars. Mutual funds owned almost 19% of all US stocks by the beginning of 1999.

Household Choices in Saving:
       1.       Hold liabilities of traditional intermediaries (savings accounts,MMDAs)
       2.       Hold securities directly
       3.       Hold securities indirectly
                Indirect investing refers basically to trading shares of investment companies.

Investment Companies
 Financial organization that sells shares on itself to the public and uses the funds it raises to invest in a portfolio
    of securities such as money market instruments or stocks or bonds
 Don’t pay taxes on any distribution if
          Qualify as a regulated investment company (earns 90% of its income from security transactions) and
          If at least 90% of its taxable income each year is passed onto the shareholder
 Must register with the SEC
 Not insured or guaranteed
 Types:
     Managed
                  Closed-end
                  Open-end
     Unmanaged

Unmanaged Funds
   Unit Investment Trusts
    Unmanaged, usually fixed income
    Handled by an independent trustee
    Redeemable trust certificates
              Sold at the NAV + small commission
    All interest (dividend) and principal repayment distributed to holders
    Most hold tax-exempt securities
    Recently some have been created for stock
    Passive investment
    Designed to be bought and held with capital preservation as a major objective
              Trust ceases to exist when the bond matures
    If conditions change, investor loses the ability to make rapid, inexpensive, or costless changes in their

Managed Funds
(1) Closed End Funds
     Do not buy their shares back
     Capitalization is fixed until issue new public offering
     Shares trade in a secondary market
     Special type of closed-end fund---Dual Purpose Funds
               Limited life
               2 Classes
                        income
                        capital

         Prices fluctuate widely from the NAV
                   Discount
                   Premium

(2) Open End Fund
     Referred to as a mutual fund
     Continues to sell shares after the initial sale of shares that starts the fund
     Capitalization continually changing
     Purchase
        Direct from fund
        Indirect from sales agent
     Fund must buy back shares at current NAV
     Fund is a corporation formed by an investment advisory firm that selects the board of trustees.
     Trustees hire a management company.
            Management company
                     research
                     manage the portfolio
                     administrative chores
                     receives a fee for services
     To get into a fund:
        2/3 require $1000 or less
        85% require $5000 or less
        IRA-minimum requirement often lower

Types of Mutual Funds:
         Short-term—money market
         Long-term—equity or bond or combination

Short-term----Money-Market Funds
 Portfolio consist of money-market instruments
 Three Types
     General Purpose
     Broker-dealer
     Institutional
 Funds can be
     Taxable
     Tax-exempt
 Taxable funds
     Commercial paper make up 40-50% of fund assets
     Avrg maturity –1-2 months
     SEC set max maturity at 90 days
 Tax-Exempt
     Types
               National
               State—invest in only one state
 No sales Charge
 No redemption charge
     Redeemed by phone or wire
 Management Fee
 Interest earned and credited daily
 Some offer check writing privileges

   Not insured

 Equity and Bond/Income Funds
 Objective
        18 categories (Investment Company Institute)
                Other companies such as Lipper or Morningstar have a different number of categories
        investor matches their personal objective to fund objective
   Stock Funds
     Account for 54% of total assets in the mutual funds market (1999)
     Stock funds can be divided into two main categories
              Value
              Growth
   Funds can be sold either
     Directly by the company
     Sales force (brokers, insurance agents, and financial planners)
 Load Funds
     Sales fee when purchase
     Fee goes to marketing organization (the company itself or its sales force) selling the shares
        Fee split between the salesperson and the company selling the shares
     Typically no redemption fee (back-load)
     12b-1 fee
        distribution fee
        has ranged as high as 1% of average assets of fund
        50% of funds charge a 12b-1
     Combination of fees
        Different classes have different combination of sales charge, annial,12b-1 or redemption fees
   No Load Funds
     Bought at NAV directly from the fund
     Investors must purchase and redeem by mail, wire, or phone
 Performance Benchmarks
    S&P 500 Composite Index
    Russell 2000 (index for small companies)
   Returns
    Total return
    Cumulative total return
    Average annual return

Performance consistency has been researched and there is (as usual) conflicting evidence on whether past
performance can be maintained. As a result the index funds with lower expenses have gained popularity.

    Operating expenses charged by all funds
      Management fees
      Overhead charges
      12b-1 fees

Investing Internationally
    Types
         Mutual Funds
                  International funds
                  Global funds
                  Single country funds (usually closed-end funds)
         US companies with strong earnings abroad
    More volatile than the market as a whole
    Passively managed country funds-geared to match a foreign stock index of a particular country
      Morgan Stanley’s World Equity Benchmark Shares (WEBS)
      Deutsche Morgan Grenfell’s Country Baskets