Investment companies
Download
1 / 24

Investment Companies - PowerPoint PPT Presentation


  • 263 Views
  • Uploaded on

Investment Companies. Economics 71a: Spring 2007 Mayo 17, Malkiel 8 Lecture 4.8. Goals. History Closed and open funds Performance and fees Types of funds Index funds ETF’s Hedge funds How well do funds perform?. History. First funds, March 1924 State Street Research

loader
I am the owner, or an agent authorized to act on behalf of the owner, of the copyrighted work described.
capcha
Download Presentation

PowerPoint Slideshow about 'Investment Companies' - Gideon


An Image/Link below is provided (as is) to download presentation

Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author.While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server.


- - - - - - - - - - - - - - - - - - - - - - - - - - E N D - - - - - - - - - - - - - - - - - - - - - - - - - -
Presentation Transcript
Investment companies l.jpg

Investment Companies

Economics 71a: Spring 2007

Mayo 17, Malkiel 8

Lecture 4.8


Goals l.jpg
Goals

  • History

  • Closed and open funds

  • Performance and fees

  • Types of funds

    • Index funds

    • ETF’s

    • Hedge funds

  • How well do funds perform?


History l.jpg
History

  • First funds, March 1924

    • State Street Research

    • Massachusetts Investment Trust

      • Massachusetts Financial Services

      • now owned by Sun Life of Canada

  • Boston is key location

  • Growth

    • Recently phenomenal

    • Increase in total capital between 25-50 times since 1980

    • Number of funds has also exploded

      • 1980 = 468 funds in U.S

      • 1997 = 5,765

      • Today around 10,000


Closed versus open funds l.jpg
Closed versus Open Funds

  • Closed end fund

    • Traded like regular stock (price)

    • Fixed number of shares

    • Basically a corporation whose only assets are its portfolio

  • Open end fund

    • New shares issued for each buyer

    • Valued at current market value of the fund portfolio

      • Net asset value (NAV)


Net asset value nav l.jpg
Net Asset Value (NAV)

  • Total net worth of fund

    • Assets - Liabilities

    • Assets: Stocks, bonds

    • Liabilities: Borrowing

  • NAV/share


More on closed versus open l.jpg
More on Closed versus Open

  • Most funds are Open-End

  • Closed-end funds occasional trade differently from their asset values (NAV)

  • P<NAV, or P>NAV


Performance open end reported numbers often exclude fees l.jpg
Performance (open end)(Reported numbers often exclude fees.)

  • NAV = Net asset value

  • I, CG = Income + Capital gain distributions


Performance closed end l.jpg
Performance (closed end)

  • P = Market price

  • I, CG = Income + Capital gain distributions


Costs and fees l.jpg
Costs and Fees

  • Loading fees (paid at start, 3-6 percent)

  • 12b-1 fees (sales expenses)

    • Continue over years

  • Management fees

    • Paid to investment advisor

    • Between 0.25 and 1.5%

  • Fund expenses (legal, admin)

  • Trading costs


Benefits l.jpg
Benefits

  • Diversification

  • Stock selection skills

  • Bookkeeping


Types of funds l.jpg
Types of Funds

  • Stocks

  • Bonds

  • Money Market


Stock funds l.jpg
Stock Funds

  • Index (see next slide)

  • Growth

  • Value

  • Sector

  • Market neutral

  • Green and socially responsible funds

  • International

    • Country

    • Emerging markets


Index mutual funds l.jpg
Index Mutual Funds

  • Designed to match (but not beat) the market

  • Examples

    • Track S&P 500

    • Country funds

  • Why?

    • Market efficiency

    • Cost


Other index instruments exchange traded funds etf l.jpg
Other Index InstrumentsExchange Traded Funds (ETF)

  • Traded on regular exchanges

  • Can be short sold

  • Types

    • Standard and Poors Depository Receipts (SPDRS)

    • World Equity Benchmarks (WEBS)

    • Diamonds (Dow)

    • Qubes (NASDAQ) (QQQ)


More etf info see economist l.jpg
More ETF Info (See Economist)

  • Growing fast

  • Expanding into new areas

    • Gold

    • Nanotechnology

    • “Ultrashort QQQ”

      • Goes down 2% when NASDAQ up 1%

  • Advantages

    • Easy to trade long or short indices

  • Disadvantages

    • May encourage short run trading

    • Liquidity for some may be low


Hedge funds l.jpg
Hedge Funds

  • Small numbers of large investors (> $1.5 million)

  • Not SEC regulated (registered)

  • More flexible in strategies

    • May hold derivatives

    • Short sales

    • Leveraged (borrowing)

  • Performance based fees

    • 2% of total assets and then

    • 20% of profits

    • (2 and 20)

  • Limit withdrawals


Other managed funds l.jpg
Other Managed Funds

  • Funds of hedge funds

  • Pension funds

  • Insurance companies

  • Endowments/foundations


Mutual fund performance l.jpg
Mutual Fund Performance

  • Malkiel Chapter 8

  • Good data experiment

    • Do mutual funds out perform the rest of the market?


Mutual funds vs market l.jpg
Mutual Funds vs.Market

  • 10 years ending December 31, 2001

    • S&P 500: +12.94 % per year

    • Stock mutual funds: +10.98 %

  • Rankings: 70’s -> 90’s

    • Twentieth century growth

      • 1 -> 176

    • Templeton growth

      • 2 -> 126


More on rankings l.jpg
More on rankings

  • Average return in 70’s

    • Top 20 funds in 70’s

      • +19%

    • All funds

      • +10.4%

  • Average return in the 80’s

    • Top 20 funds in the 70’s

      • 11.1%

    • All funds

      • 11.7%


More on rankings21 l.jpg
More on rankings

  • Average return in 80’s

    • Top 20 funds in 80’s

      • +18%

    • S&P

      • +14%

  • Average return in the 90’s

    • Top 20 funds in the 80’s

      • 13.7%

    • S&P

      • 14.9%


The problem of size and success for mutual funds l.jpg
The Problem of Size and Success for Mutual Funds

  • As funds get bigger size gets in the way

    • Difficult to buy stocks

      • 50 stock fund

        • 1 billion in assets

        • Control <5% in each stock

        • Universe = 1850

      • 50 stock fund

        • 20 billion in assets

        • <5% in each stock

        • Universe = 182

    • Transaction costs and “price impact”


Gurus luck versus chance l.jpg
Gurus: Luck Versus Chance

  • Appear to be some people who do well consistently

  • Peter Lynch: Michael Jordan of mutual funds (retired ahead)

  • Generates consistent performance

  • Is he smart or lucky?

  • Statistically, we should see some people do well for long periods of time do to chance

  • “Survivorship Bias”


Summary l.jpg
Summary

  • Mutual funds are convenient way to diversify portfolios

  • Index funds are a powerful tool

  • Performance of the industry in general is not great


ad