金融市场与机构教学课件：ch21 The Mutual Fund Industry

Chapter21TheMutual

FundIndustryChapterPreview Supposeyouwantedtostartsavingsforretirement,butyoucanonlyaffordtoinvest$100/month.Howdoyoudevelopadiversifiedportfolio?Mutualfundsareonepotentialanswer.Mutualfundspoolfundsunderaprofessionalmanagerwhothenchoosesthesecuritiestoinvestin.2Copyright©2009PearsonPrenticeHall.Allrightsreserved.ChapterPreviewWestudywhymutualfundshavebecomesopopular,thevarioustypesofmutualfunds,theirregulation,andscandalsinthemutualfundindustry.Topicsinclude:TheGrowthofMutualFundsMutualFundStructureInvestmentObjectiveClassesFeeStructureofInvestmentFunds3Copyright©2009PearsonPrenticeHall.Allrightsreserved.ChapterPreview(cont.)RegulationofMutualFundsHedgeFundsConflictsofInterestintheMutual

FundIndustry4Copyright©2009PearsonPrenticeHall.Allrightsreserved.MutualFundsMutualfundspooltheresourcesofmanysmallinvestorsbysellingthemsharesandusingtheproceedstobuysecurities.5Copyright©2009PearsonPrenticeHall.Allrightsreserved.TheGrowthofMutualFundsAtthebeginningof2007,nearly16%ofassetsheldbyintermediarieswereheldbymutualfunds.25%oftheretirementmarketandalmost50%ofallU.S.householdsholdstockviamutualfunds.Assetsheldbymutualfundshavegrownbyover17.5%peryearforthelast20years,reachingover$10trillionby2007.6Copyright©2009PearsonPrenticeHall.Allrightsreserved.TheGrowthofMutualFundsThefirstmutualfundsimilartothefundsoftodaywasintroducedinBostonin1824.Thestockmarketcrashof1929setthemutualfundindustrybackbecausesmallinvestorsavoidstocksanddistrustedmutualfunds.TheInvestmentCompanyActof1940reinvigoratedtheindustrybyrequiringbetterdisclosureoffees,etc.7Copyright©2009PearsonPrenticeHall.Allrightsreserved.TheGrowthofMutualFundsTherearefiveprincipalbenefitsofmutualfunds:Liquidityintermediation:investorscanquicklyconvertinvestmentsintocashwhilestillallowingthefundtoinvestforthelongterm.Denominationintermediation:investorscanparticipateinequityanddebtofferingsthat,individually,requiremorecapitalthantheypossess.Diversification:investorsimmediatelyrealizethebenefitsofdiversificationevenforsmallinvestments.8Copyright©2009PearsonPrenticeHall.Allrightsreserved.TheGrowthofMutualFundsTherearefiveprincipalbenefitsof

mutualfunds:Costadvantages:themutualfundcannegotiatelowertransactionfeesthanwouldbeavailabletotheindividualinvestor.Managerialexpertise:manyinvestorsprefertorelyonprofessionalmoneymanagerstoselecttheirinvestments.9Copyright©2009PearsonPrenticeHall.Allrightsreserved.TheGrowthofMutualFundsOwnershipinmutualfundshaschangeddramaticallyoverthelast20yearsIn1980,only5.7%ofhouseholdsheldmutual

fundsharesInthebeginningof2007,thatnumberwas48%Mutualfundsaccountfor$4.1trillionoftheretirementmarket(estimatedat$16.4trillion)Thenextfourslidesshowthetimeseriesofthesetrends.10Copyright©2009PearsonPrenticeHall.Allrightsreserved.TheGrowthofMutualFundsTheGrowthofMutualFunds(cont.)TheGrowthofMutualFunds13Copyright©2009PearsonPrenticeHall.Allrightsreserved.TheGrowthofMutualFunds14Copyright©2009PearsonPrenticeHall.Allrightsreserved.MutualFundStructureInvestmentcompaniesusuallyofferanumberofdifferenttypesofmutualfunds.Investorscanoftenmoveinvestmentsamongthesefundswithoutpenalty.Thecomplexesoftenissue

consolidatedstatements.Mutualfundfactbook/aboutfunds/factbook_toc.html15Copyright©2009PearsonPrenticeHall.Allrightsreserved.MutualFundStructureClosed-EndFund:afixednumberofnonredeemablesharesaresoldthroughaninitialofferingandarethentradedintheOTCmarket.Priceforthesharesisdeterminedbysupplyanddemandforces.Open-EndFund:investorsmaybuyorredeemsharesatanypoint,wherethepriceisdeterminedbythenetassetvalueofthefund.16Copyright©2009PearsonPrenticeHall.Allrightsreserved.CalculatingaMutualFund’s

NetAssetValueNetAssetValue(NAV)Definition:Totalvalueofthemutualfund’sstocks,

bonds,cash,andotherassetsminusanyliabilities

suchasaccruedfees,dividedbythenumberof

sharesoutstanding17MutualFundStructure:

theOrganizationTheshareholders,orowners,ofthemutualfundaretheinvestors.Theboardofdirectorsoverseesthefund’sactivities,hirestheinvestmentadvisor,anunderwriter,etc.,tomanagethedaytodayoperationsofthefund.18Copyright©2009PearsonPrenticeHall.Allrightsreserved.MutualFundStructure:

theOrganization19MutualFundStructure:

theOrganizationIntheory,theboardcanfirethefundmanagerandhireanyonetheychoose.Forinstance,theboardfortheFidelityMagellanFundcanfireFidelity.Ofcourse,iftheboardhiresanon-Fidelitymanagementteam,thefundwillprobablyloseitsname,andpossiblyitsreputationalongwithit.20Copyright©2009PearsonPrenticeHall.Allrightsreserved.InvestmentObjectiveClassesTherearefourprimaryclassesofmutualfundsavailabletoinvestors:Stock(equity)fundsBondfundsHybridfundsMoneymarketfundsThenextslideshowsthedistributionofassetsamongthesedifferentclasses.21Copyright©2009PearsonPrenticeHall.Allrightsreserved.InvestmentObjectiveClasses22Copyright©2009PearsonPrenticeHall.Allrightsreserved.InvestmentObjectiveClassesStockFundsOtherthaninvestingincommonequity,thestatedobjectiveofanyparticularfundcanvarydramatically.CapitalAppreciationFundsseekrapidincreaseinshareprice,notbeingconcernedaboutdividends.TotalReturnFundsseekabalanceofcurrentincomeandcapitalappreciation.WorldEquityFundsinvestprimarilyinforeignfirms.OthertypesinValue,Growth,aparticular

industry,etc.23Copyright©2009PearsonPrenticeHall.Allrightsreserved.InvestmentObjectiveClassesBondFundsStrategicIncomeFundsinvestprimarilyinU.S.corporatebonds,seekingahighlevelof

currentincome.GovernmentBondFundsinvestinU.S.Treasury,aswellasstateandlocalgovernmentbonds.OthersincludeWorldBondFunds,etc.Thenextfigureshowsthedistributionofassetsamongthebondfundclassifications.24Copyright©2009PearsonPrenticeHall.Allrightsreserved.InvestmentObjectiveClasses25Copyright©2009PearsonPrenticeHall.Allrightsreserved.InvestmentObjectiveClassesHybridFundsCombinestocksandbondsintoasinglefund.Accountforabout6%ofallmutual

fundaccounts.26Copyright©2009PearsonPrenticeHall.Allrightsreserved.InvestmentObjectiveClassesMoneyMarketMutualFundsOpen-endfundsthatinvestonlyinmoneymarketsecurities.Offercheck-writingprivileges.Netassetshavegrowndramatically,asseeninthenextslide.27Copyright©2009PearsonPrenticeHall.Allrightsreserved.InvestmentObjectiveClasses28Copyright©2009PearsonPrenticeHall.Allrightsreserved.InvestmentObjectiveClassesMoneyMarketMutualFundsAlthoughmoneymarketmutualfundsofferhigherreturnsthanbankdeposits,thefundsarenotfederallyinsured.ThenextslideshowsthedistributionofassetsinMMMF,whicharerelativelysafeassets.29Copyright©2009PearsonPrenticeHall.Allrightsreserved.InvestmentObjectiveClasses30Copyright©2009PearsonPrenticeHall.Allrightsreserved.InvestmentObjectiveClassesIndexFundsAspecialclassofmutualfundsthatdofitintoanyofthecategoriesdiscussedsofar.Thefundcontainsthestockoftheindexitismimicking.Forexample,anS&P500indexfundwouldholdtheequitiescomprisingtheS&P500.Offersbenefitsoftraditionalmutualfundswithoutthefeesoftheprofessional

moneymanager.31Copyright©2009PearsonPrenticeHall.Allrightsreserved.FeeStructureofInvestmentFundsLoadfunds(classAshares)chargeanupfrontfeeforbuyingtheshares.No-loadfundsdonotchargethisfee.Deferredload(classBshares)fundschargeafeewhenthesharesareredeemed.Iftheparticularfundchargesnofrontorbackendfees,itisreferredtoasclassCshares.32Copyright©2009PearsonPrenticeHall.Allrightsreserved.FeeStructureofInvestmentFundsOtherfeeschargesbymutualfundsinclude:contingentdeferredsalescharge:abackendfeethatmaydisappearaltogetherafteraspecificperiod.redemptionfee:anothernameforabackendloadexchangefee:afee(usuallylow)fortransferringmoneybetweenfundsinthesamefamily.accountmaintenancefee:chargesiftheaccountbalanceistoolow.12b-1fee:feetopaymarketing,advertising,

andcommissions.33Copyright©2009PearsonPrenticeHall.Allrightsreserved.RegulationofMutualFundsMutualfundsareregulatedbyfourprimarylaws:SecuritiesActof1933:specifies

disclosurerequirementsSecuritiesExchangeActof1934:details

antifraudrulesInvestmentCompanyActof1940:requiresregistrationandminimaloperatingstandardsInvestmentAdvisorsActof1940:regulates

fundadvisors34Copyright©2009PearsonPrenticeHall.Allrightsreserved.RegulationofMutualFundsMutualfundsaretheonlycompaniesintheU.S.thatarerequiredbylawtohaveindependentdirectors,asfollows(2001SECrules)Independentdirectorsmustconstituteamajorityof

theboardIndependentdirectorsselectandnominateotherindependentdirectorsLegalcounseltotheindependentdirectorsmustalsobeindependent35Copyright©2009PearsonPrenticeHall.Allrightsreserved.HedgeFundsAspecialtypeofmutualfundthatreceivedconsiderableattentionfollowingthecollapseofLongTermCapitalManagement.Differentfromtypicalmutualfunds,asfollows:Highminimuminvestment,averagingaround$1millionLong-termcommitmentoffundsisrequiredHighfees:typically1%ofassetsplus20%ofprofitsHighlyleveredLittlecurrentregulation36Copyright©2009PearsonPrenticeHall.Allrightsreserved.HedgeFundsHedgefundsareoftentryingtotakeadvantageofunusualspreadsbetweensecurityprices37TheLTCMDebacle LongTermCapitalManagementwasahedgefundrunbyJohnMeriwether(theformerheadofbondtradingatSalomonBrothers),anditsboardincludedNobelLaureatesMyronScholesandRobertC.Merton.Itrecordedreturnsinexcessof30%forthefirstseveralyears.38Copyright©2009PearsonPrenticeHall.Allrightsreserved.TheLTCMDebacle However,ittookbetsthatwentthewrongway.Itscollapsewaseminent,andregulatorsdecidedtheyhadtodevelopabailout.LTCMhadover$80billioninequitypositionsandover$1trillioninderivativepositions.ItsfailurecouldhavebeendevastatingfortheU.S.economy.39Copyright©2009PearsonPrenticeHall.Allrightsreserved.TheLTCMDebacle HedgefundshavecontinuedtofailsinceLTCM.AmaranthAdvisorsloss$6billioninoneweekinnaturalgasfutures.Otherfundshavesimilarlosses.Indeed,hedgefundinvestingisapotentiallyhighriskgameforwell-heeledinvestors(gamblers?)40Copyright©2009PearsonPrenticeHall.Allrightsreserved.HedgeFundsTheSECpassedregulationin2006requiringhedgefundadvisorstoregisterwiththeSEC.TheSECbecameconcernedaboutfraud,andhedgefundsbecameavailabletotheaverageinvestorvia“retailization”.41Copyright©2009PearsonPrenticeHall.Allrightsreserved.ConflictsofInterest

intheMutualFundIndustryInvestorconfidenceinthestabilityandintegrityofthemutualfundindustry

iscritical.However,theusualproblemsofasymmetricinformationandtheprincipal-agentproblemarose,leadingtoabusesonthepartoffundmanagement.42Copyright©2009PearsonPrenticeHall.Allrightsreserved.ConflictsofInterest

intheMutualFundIndustryMutualFundAbusesLatetrading:allowingtradesafter4:00pmtotradeattoday’s4:00NAVinsteadoftomorrow’sprice.Thisisillegalunder

SECregulations.Markettiming:takingadvantageoftimezonedifferencesfordeterminationofNAV.ThisisnotillegalunderSECrulings.43Copyright©2009PearsonPrenticeHall.Allrightsreserved.ConflictsofInterest

intheMutualFundIndustryGovernmentResponsetoAbusesRequiremoreindependentdirectorsHardeningthe4:00valuationrule:thisaddressesthelatetradingproblem,butnotmarkettiming.Increasedandenforcesredemptionfees:feestodiscouragemarkett