Investing in Funds

1. Investing in Funds October 27, 2008

2. This Week: Investing in Funds

3. What to Look For in Actively Managed Funds • Expense Ratio • Tax Efficiency • Investing Goals and Style • Management Incentives and Interests • Ownership • Fee Structure • Historical Returns • But be careful because historical returns often aren’t indicative of future returns!

4. Examples of Value-Oriented Funds • Fairholme (FAIRX) • Longleaf Partners (LLPFX) • Sequoia Fund (SEQUX) • Periods of underperformance when value is out of favor. • Relying on the decisions of management.

5. Exchange Traded Funds (ETFs) • If the ETF tracks an index, you don’t have to worry about tax efficiency, evaluating a manager, but do pay attention to expenses! • “A security that tracks an index, a commodity, or a basket of stocks like an index fund, but trades like a stock on an exchange.” • Pay same commission as a regular trade ($7 at Scottrade, remember to use limit orders). • Buy and sell anytime markets are open.

6. Keeping ETFs Fairly Priced: Arbitrage • ETFs have an underlying net asset value (NAV). • Depending on supply and demand, the price of an ETF may deviate from its NAV. • When trading at a discount, authorized arbitragers can buy ETF shares and exchange those shares for the underlying securities and sell those securities, or vise-versa if the ETF is trading at a premium. • This keeps the price of the ETF close to its NAV, and thus fairly valued.

7. Examples of ETFs • Sector-Specific • Country-Specific: EWZ, EWY, FXI • Commodities, Dynamic Indexes • Index Funds: VTI, VEU, VNQ, VWO, IVV, SPY

8. Simple Indexed ETF Portfolio • 60% VTI – Vanguard Total Stock Market Index, ER 0.07% • 40% VEU – Vanguard FTSE All World Ex-US Index, ER 0.25% • Add bonds later • Weighted ER of 0.14% • Holds Over 5,000 Stocks

9. Index Mutual Funds • Higher minimums. • Better for small, frequent purchases (DCA). • Avoid trading costs by buying directly. • Only priced and traded at the close of the day. • Vanguard (generally $3,000 minimum).

10. Morningstar Available via OSU libraries and ccig.osu.edu: http://proxy.lib.ohio-state.edu/login?url=http://library.morningstar.com

11. Morningstar • Aggregates Fund Data • Expenses • Historical Returns • After-Tax Returns • Holdings • Also Rating System and Analyst Reports • Portfolio X-Ray • Displays data for a portfolio of funds • Sometimes more data than you really need…

12. Holdings

13. Fees and Taxes

14. Some Related Reading • A Random Walk Down Wall Street by Burton Malkiel • Common Sense on Mutual Funds by Jack Bogle • The Bogleheads’ Guide to Investing • Morningstar’s Guide to Mutual Funds

15. Summary • Do some research, read one or two books and you will be set. • Weigh the pros and cons of investing in active versus passive funds. • CCIG generally is not focused on investing in funds, but we can point you in the right direction. • Remember that enterprising investors may still choose ETFs for easy and inexpensive exposure to specific industries, countries, etc.

16. Questions?

17. Club Portfolio

18. Goals • Show by realistic example how to choose investments. • Provide a sample portfolio of value investments for a college-aged investor. • Learn about different stocks and companies and what makes them attractive investment opportunities. • Encourage discussion and debate. • Maintain records of the portfolio to learn from mistakes and successes.

19. Parameters • Start with $20,000 cash. • Trades cost $7 (Scottrade pricing). • Placing a trade requires that a majority of present and voting members approve the transaction. • Provide rationale and analysis (as well as continuing discussion) for each investment on the appropriate forum page.

20. Analysis • Reason for Buying • Selling Strategy / Expected Duration • Reason for Selling • Analysis (what went well, what didn’t)

21. Core-Mark (CORE) • Vote on the forum! • Voting will close Tuesday night (with the votes tallied Wednesday morning).

22. Questions?Suggested Meeting Topics?Comments on the First Few Weeks

23. ccig.osu.edu