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Comprehensive Guide to Investment Companies Operation

Understand the ins and outs of investment companies, from types of funds to performance studies and regulations. Learn about portfolio objectives, fund management, and the role of investment analysts. Explore the differences between open-end and closed-end funds, and the implications of various performance studies on market efficiency. Delve into the world of mutual funds and the importance of diversification in reducing risk for investors.

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Comprehensive Guide to Investment Companies Operation

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  1. MUTUAL FUNDS OPERATION CHAPTER 23 Dr David P Echevarria

  2. INVESTMENT COMPANIES • Definition of an Investment Company; A pool of funds belonging to individuals used to acquire a collection of individual securities such as stocks, bonds, or other publicly traded securities. The value of shares in the fund is determined daily by the Net Asset Value (NAV). • Management of Investment Companies • Portfolio Managers • Investment Analysts • Transfer Agent Dr David P Echevarria

  3. INVESTMENT COMPANIES • Types of Funds • Open-Ended • Investment pools which continue to take investor funds • Redemptions by fund at Net Asset Values (NAV) • Closed-End Funds • A one-time subscription. • Stock traded in secondary market; stock price typically < NAV • No redemptions by fund; if you want out, sell in market. (NYSE, AMEX) • Load vs. No-Load Open-End Funds • Exchange traded ETF • Hedge Funds Dr David P Echevarria

  4. INVESTMENT COMPANIES • Investment Company Portfolio Objectives • Common Stock Funds; • Growth, Income, G&I, International, Sector, Specialized • Balanced Funds; dividend paying stocks & bonds • Bond Funds, Money Market Fund, Real Estate Investment Trusts • Hedge Funds • Performance of Investment Companies • Sharpe Study; Excess Return per Unit of Risk • Few funds outperform the DJIA • Jensen Study; Examining intercept term (a) • alpha = abnormal return: Is alpha different from zero? • Results: funds earn 1.1% less per year given their level of risk • Carlson Study; three categories, none outperformed the S&P 500 Dr David P Echevarria

  5. INVESTMENT COMPANIES • Implications of Performance Studies • For market efficiency: you cannot beat the market • For active versus passive management • Risk reduction through diversification • The exception • Warren Buffet (Berkshire Hathaway) • Long-run average performance measurement bias Dr David P Echevarria

  6. REGULATION • SEC is principal oversight body • Investment Company Act (1940) is primary legislation as amended • 1993: Prospectus requires revealing names, etc., of managers. • 90% of income must be distributed to investors • Investment Advisor Act – must register if more than $25 million under management. Dr David P Echevarria

  7. HOMEWORK QUESTION • What important services do Investment Companies provide investors? • How do Open-end and Closed-end funds differ? • What is the advantage of a no-load fund? Advantage of a front-end load fund? • Why are there different types of funds? • How does the Sharpe Measure differ from the Jensen measure? • Overall, what is the verdict on Professional Fund Managers (in general)? Dr David P Echevarria

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