Investment Companies

1
Investment Companies

• Some nomenclature
• Types (management companies)
• Open-end (mutual fund) continuously sells and
  redeems (all transactions with issuer)
• Closed-end fixed number of shares issued (all
  post-issue transactions on market)
• Mutual fund structure
• Fund adviser, distributor, directors
• Family of funds (nature of ownership - mutual or
  for-profit)
• Competition
• Insurance special accounts - variable annuities
• Bank agency accounts

2
How does mutual fund operate?

• Services
• Investment (diversification)
• Voting
• Marketing/advertising
• Management
• Fees and expenses
• Marketing/advertising fees
• Advisory and investment expenses
• Management expenses
• QUESTIONS
• How are mutual funds regulated? Why must mutual
  funds register?
• Why are mutual funds diversified? What does this
  mean? (75 of portfolio - not more than 5 in any
  one issuer, not more than 10 of stock of any one
  issuer)
• Reason for extensive federal regulation? Focus -
  disclosure, structure, ex ante prohibitions, ex
  post enforcement?

3
Types of portfolios

• Equity (more US mutual funds than US
  publicly-traded operating companies)
• Growth
• Large-cap
• Small-cap
• Index
• Sector
• International/global
• Debt
• Long-term
• Short-term
• Money market (priced daily so shares
  dollars)
• Government
• Tax-free municipal
• Junk bonds
• QUESTIONS
• What drives investor choice of funds?

4
The mutual fund gorilla

• Size (equity and debt)
• 2003 - 7,000 billion
• 1999 - 5,500 billion
• 1989 - 900 billion
• Percentage (US public equity market)
• 2003 - 25.0
• 2000 - 21.4
• 1995 - 14.6
• 1990 - 6.9
• 1985 - 5.3
• Under management 33

5
How is mutual fund managed?

• Mutual fund adviser does it all
• sets up fund (organized as corporation or
  business trust)
• chooses investment style
• puts in initial board of directors
• Directors (or trustees) are ostensible watchdogs
• approves advisory contract
• approves fees
• supervises conflicts of interest
• Computation of value
• Rule 22c-1 NAV at least once daily
• industry practice 400pm EST
• QUESTIONS
• Compare mutual fund to an operating corporation?
• Do (should) MF directors function like corporate
  directors?