FIN3244 Test 3 Study Guide o Mutual fund performance The first mutual fund started in boston in 1924 and today we To put that in perspective there are more mutual funds in have seen over 8 000 publicaly traded mutual funds existence today than there are stocks listed on the New York and American Stock Exchanges combined It is now the largest financial intermediary in the country ahead of banks 91 million individuals in the U S who own mutual funds The level of dividends paid by the fund capital gains growth in capital are all important aspects of return and in addition you must assess risk Capital gains dividends and change in price paper profits or NAV of a fund In a closed end fund it is also by price discounts or premium You can see the performance in the summary of income and capital changes In order to predict the future of the product it is important to look at the market but past performance has a lot to do with it as well returns dividends capital gains and change in price use the holding period formula for less than a year or internal rate of return for more than a year A way to measure performance is to describe it in terms of o Mutual fund turnover Mutual funds appeal to investors from all walks of life and all income level Mutual funds levy a management fee as well as transaction costs Despite professional management mutual fund performance over the long haul is at best about equal to what you would expect from the market as a whole There are notable exceptions however most funds do little more than keep up with the current market but most don t even do that On the S P 500 in 2006 only 5 mutual funds outperformed the market Beating the market is not easy even for professionals have to factor in the strong market conditions and the reinvestment of dividends and capital gains o Growth funds the goal is capital appreciation long term Many mutual funds do well over the longhaul but you also o Types of Mutual Funds growth and capital gains Invested primarily in well o Aggressive growth funds known as performance funds established large or mid cap companies with above average growth potential They offer little if anything of dividends and current income Good for aggressive investors because of the high risk they are highly speculative investment vehicles that seek large profits from capital gains Most are small but consist of high flying common stocks It is typical for this type of fund to buy stocks of small unseasoned companies stocks with high earning multiples and common stocks with volatile pricing Deisgned to have big returns highly speculative and the most volatile of all of the mutual funds When the market is bad they experience loss o Value funds seeks stocks that are undervalued in the market by investing in shares that have low p e multiples high dividend yields and promising futures They have growth potential investors look for low earning ratio high dividend yield moderate amounts of financial leverage They prefer companies that are undiscovered Involves extensive evaluation of corporate financial statements and other documents to uncover value before the rest of the market does It is less risky than growth investing Therefore they are a viable alternative for conservative investors who want attractive returns but not the price volatility o Equity income funds a mutual fund that emphasizes current income and capital preservation and invests primarily in high yielding common stocks Invest heavily in high grade common stocks convertible securities and preferred stock occasionally junk bonds or certain high grade foreign bonds financial shares and prefer a stock with a hefty dividend volatility Lean toward blue chip stocks public utilities and Have higher quality securities with less price o Balanced funds hold a balanced portfolio of both stocks and bonds for the purpose of generating a balanced return of both current income and long term capital gains Keep 30 40 of their portfolios in bonds used to provide current income and stocks are used for long term growth The more it leans towards current income more fixed stocks competitive rate funds Safe way to invest not very volatile and can earn a Equity income are more income oriented balanced o Growth and income funds seeks a long term growth and current income with primary emphasis on capital gains They put most of their money into equities 80 90 in common stocks Looks for quality stocks and also blue chip stocks with high quality income stocks volatile and risky as a primary objective Invests in treasury and agency bonds corporate and municipals Income is the primary objective More liquid cost effective way to achieve a high o Bond funds invests in various types of bonds with income degree of diversification reinvest interest and other income and they are conservative o Money market funds pools the capital of investors and uses it to invest in short term money market instruments Bank certificates U S Treasury Bills Maximum maturity can not exceed 90 days Highly liquid o Index funds buys and holds a portfolio of stocks equivalent to those in a specific market index Try to match the market Strictly buy and hold Low portfolio turnover rates o Types of mutual funds characteristics o Sector Funds mutual fund that restricts its investments to a particular segment of the market o Asset allocation Funds mutual fund that spreads investors money across stocks bonds money market securities and possible other asset classes its investing in foreign securities o International Funds mutual fund that does all or most of o Pooled diversification the idea that combining the investment capital of a group of people with similar investment goals and investing capital in a wide array of securities This reduces risk while spreading holding over a wide variety of industries and companies o Open ended fund mutual funds are commonly used to describe open ended investment companies Investors can buy their shares from and sell them back to the mutual fund itself with no limit on the number of shares the fund can issue Never any trading of shares between individuals When an investor buys shares in an open end fund the fund issues new shares of stock and fills the purchase order with those new shares There is no limit They are the dominant type of investment company and account for over 95 of the assets under management They hold billions of dollars Both buying and selling transactions are carried out at prices based on the current market
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