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Bus 315 - Chapter 4 - Mutual Funds and Other Investment Companies

This document provides an overview of investment companies and mutual funds. It defines mutual funds as a common form of investment company that pools money from individual investors to invest in a wide range of securities. The document outlines the different types of mutual funds based on their investment policies, including money market, equity, bond and balanced funds. It also discusses the costs associated with mutual fund investing as well as performance measures and sources of information for investors.

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31 views21 pages

Bus 315 - Chapter 4 - Mutual Funds and Other Investment Companies

This document provides an overview of investment companies and mutual funds. It defines mutual funds as a common form of investment company that pools money from individual investors to invest in a wide range of securities. The document outlines the different types of mutual funds based on their investment policies, including money market, equity, bond and balanced funds. It also discusses the costs associated with mutual fund investing as well as performance measures and sources of information for investors.

Uploaded by

miaotianrun0810
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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INVESTMENTS

Chapter 4
MUTUAL FUNDS AND OTHER INVESTMENT COMPANIES
CHAPTER OVERVIEW

• INVESTMENT COMPANIES
• TYPES OF INVESTMENT COMPANIES
• MUTUAL FUNDS
• COSTS OF INVESTING IN MUTUAL FUNDS
• TAXATION OF MUTUAL FUND INCOME
• EXCHANGE-TRADED FUNDS (ETFS)
• MUTUAL FUND INVESTMENT PERFORMANCE
INVESTMENT COMPANIES

Investment companies Mutual funds


Mutual funds Functions

Unit investment trusts Investment styles and policies

Hedge funds Costs of investing

Closed-end funds Performance

Sources of information
INVESTMENT COMPANIES
• POOL FUNDS OF INDIVIDUAL INVESTORS AND INVEST IN A WIDE RANGE OF SECURITIES OR
OTHER ASSETS
• SERVICES PROVIDED:
• RECORD KEEPING AND ADMINISTRATION
• DIVERSIFICATION AND DIVISIBILITY
• PROFESSIONAL MANAGEMENT
• LOWER TRANSACTION COSTS

• DIVIDE CLAIMS TO THOSE ASSETS AMONG INVESTORS


• CALCULATION OF NET ASSET VALUE (NAV)
Market Value of Assets - Liabilities
Shares Outstanding
INVESTMENT COMPANIES:
MANAGED INVESTMENT COMPANIES
INVESTMENT COMPANIES
– MANAGED INVESTMENT COMPANIES

• OPEN-END
• STAND READY TO REDEEM OR ISSUE SHARES AT THE NAV
• PRICED AT NET ASSET VALUE (NAV)

• CLOSED-END
• DO NOT REDEEM OR ISSUE SHARES
• SHARES OUTSTANDING CONSTANT; INVESTORS CASH OUT BY SELLING TO NEW INVESTORS
• PRICED AT PREMIUM OR DISCOUNT TO NAV
INVESTMENT COMPANIES:
OTHER INVESTMENT ORGANIZATIONS

• COMMINGLED FUNDS
• PARTNERSHIPS OF INVESTORS THAT POOL FUNDS

• REITS
• SIMILAR TO A CLOSED-END FUND
• EQUITY VERSUS MORTGAGE TRUSTS

• HEDGE FUNDS
• VEHICLES THAT ALLOW PRIVATE INVESTORS TO POOL ASSETS TO BE INVESTED BY A
FUND MANAGER
MUTUAL FUNDS
• MUTUAL FUNDS ARE A COMMON FORM OF INVESTING USED BY INDIVIDUAL
INVESTORS.
• COMMON NAME FOR OPEN-END INVESTMENT COMPANIES
• DOMINANT INVESTMENT COMPANY TODAY
• ACCOUNTS FOR 87% OF INVESTMENT COMPANY ASSETS
• ASSETS UNDER MANAGEMENT
• CANADA – $1.8T (IN 2020) VS. $0.46T (IN 2000)
• US – $18.7T (EARLY 2018)
MUTUAL FUNDS: INVESTMENT POLICIES
• MONEY MARKET FUNDS
• INVEST IN MONEY MARKET SECURITIES SUCH AS COMMERCIAL PAPER, REPURCHASE AGREEMENTS, OR CDS

• EQUITY FUNDS
• INVEST PRIMARILY IN STOCK

• SECTOR FUNDS
• CONCENTRATE ON A PARTICULAR INDUSTRY OR COUNTRY

• BOND FUNDS
• SPECIALIZE IN THE FIXED-INCOME SECTOR

• INTERNATIONAL FUNDS
• GLOBAL, INTERNATIONAL, REGIONAL, AND EMERGING MARKET
MUTUAL FUNDS: INVESTMENT POLICIES
• BALANCED FUNDS
• DESIGNED TO BE CANDIDATES FOR AN INDIVIDUAL’S ENTIRE INVESTMENT PORTFOLIO

• ASSET ALLOCATION AND FLEXIBLE FUNDS


• HOLD BOTH STOCKS AND BONDS
• ENGAGED IN MARKET TIMING; NOT DESIGNED TO BE LOW-RISK

• INDEX FUNDS
• TRIES TO MATCH THE PERFORMANCE OF A BROAD MARKET INDEX

• LIQUID ALTERNATIVES
• ESG FUNDS
• INVEST IN EQUITY OR FIXED- INCOME ASSETS OF COMPANIES THAT HAVE BEEN SCREENED AGAINST
ENVIRONMENTAL, SOCIAL, AND GOVERNANCE FACTORS.
MUTUAL FUNDS: HOW FUNDS ARE SOLD
HOW FUNDS ARE SOLD
• DIRECTLY BY THE FUND UNDERWRITER (I.E., DIRECT-MARKETED FUNDS)
• SOLD THROUGH THE MAIL, VARIOUS OFFICES OF THE FUND, OVER THE PHONE, OR
OVER THE INTERNET

• INDIRECTLY THROUGH BROKERS ACTING ON BEHALF OF THE UNDERWRITER (I.E.,


SALES-FORCE DISTRIBUTED)
• BROKER OR FINANCIAL ADVISERS RECEIVE A COMMISSION FOR SELLING SHARES
• POTENTIAL CONFLICT OF INTEREST

• FINANCIAL SUPERMARKETS
• SELL SHARES IN FUNDS OF MANY COMPLEXES
• BROKER SPLITS MANAGEMENT FEES WITH THE MUTUAL FUND COMPANY
COSTS OF INVESTING IN MUTUAL FUNDS

• FEE STRUCTURE:
1. MANAGEMENT FEES AND OPERATING EXPENSES
2. FRONT-END LOAD
3. BACK-END LOAD
4. TRAILING COMMISSIONS

• FEES MUST BE DISCLOSED IN THE PROSPECTUS


• FEES FOR VARIOUS CLASSES (E.G., MACKENZIE INVESTMENTS, SEPT 30, 2020)
FEES AND MUTUAL FUND RETURNS

• EXAMPLE:
• INITIAL NAV = $20
• INCOME DISTRIBUTIONS OF $.15
• CAPITAL GAIN DISTRIBUTIONS OF $.05
• ENDING NAV = $20.10
IMPACT OF COSTS ON INVESTMENT PERFORMANCE
TAXATION OF MUTUAL FUND INCOME

• PASS-THROUGH STATUS UNDER THE CANADIAN TAX CODE


• TAXES ARE PAID ONLY BY THE INVESTOR
• FUND INVESTORS DO NOT CONTROL THE TIMING OF THE SALES OF SECURITIES FROM
THE PORTFOLIO

• HIGH PORTFOLIO TURNOVER LEADS TO TAX INEFFICIENCY


• AVERAGE TURNOVER IS ABOUT 50%
EXCHANGE TRADED FUNDS

• ETFS ARE OFFSHOOTS OF MUTUAL FUNDS THAT ALLOW INVESTORS TO TRADE INDEX
PORTFOLIOS JUST AS THEY DO SHARES OF STOCK
• EXAMPLES: ISHARES, “SPIDERS,” AND “WEBS”
• THE LARGEST ETF PROVIDERS IN CANADA: BLACKROCK, BMO, AND VANGUARD

• POTENTIAL ADVANTAGES:
• TRADE CONTINUOUSLY LIKE STOCKS
• CAN BE SOLD SHORT OR PURCHASED ON MARGIN
• LOWER COSTS AND TAX EFFICIENT

• POTENTIAL DISADVANTAGES:
• PRICES CAN DEPART FROM NAV
• MUST BE PURCHASED THROUGH BROKERS, TYPICALLY FOR A FEE
GROWTH OF ETFS ON TSX OVER TIME
EXCHANGE-TRADED PRODUCTS
LISTED ON THE TSX BY TYPE
MUTUAL FUND INVESTMENT PERFORMANCE

• PERFORMANCE OF ACTIVELY MANAGED FUNDS:


• BENCHMARK FOR THE PERFORMANCE OF U.S. EQUITY FUND MANAGERS IS THE RATE OF
RETURN ON THE WILSHIRE 5000 INDEX
• WAS BELOW WILSHIRE INDEX IN 29 OF THE 48 YEARS (1971-2018)
• EVIDENCE FOR PERSISTENT INFERIOR PERFORMANCE OF PROFESSIONAL MONEY MANAGERS
• RELATIVE PERFORMANCE TENDS TO PERSIST FROM ONE PERIOD TO THE NEXT
• BAD PERFORMANCE IS MORE LIKELY TO PERSIST THAN GOOD PERFORMANCE
DIVERSIFIED EQUITY FUNDS VERSUS
WILSHIRE 5000 INDEX
CONSISTENCY OF INVESTMENT RESULTS
INFORMATION ON MUTUAL FUNDS

• PROSPECTUS
• STATEMENT OF INVESTMENT OBJECTIVES
• DESCRIBES INVESTMENT OBJECTIVES AND POLICIES
• DESCRIPTION OF FUND’S INVESTMENT ADVISER AND PORTFOLIO MANAGER
• PRESENTS FEES AND COSTS

• STATEMENT OF ADDITIONAL INFORMATION (SAI)


• FUND’S ANNUAL REPORT
• “ENCYCLOPEDIAS” OF MUTUAL FUND INFORMATION
• WWW.MORNINGSTAR.COM
• GLOBEFUND
• THE CANADIAN ETF ASSOCIATION
• TMX MONEY

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