Investment Companies - UNF



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 portfolio

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

Long-Term

• 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

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