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54 Cards in this Set

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What is an open-end/mutual fund investment company?
1. open-ended/mutual funds- investors own pro-rata shares of overall portfolio; investment manager buys and sells securities; calculate NAV each day when market closes; new investments into fund + withdrawals during day are priced into NAV; number of shares increases when more investments than withdrawals
What is NAV?
net asset value:
NAV= (market value of portfolio - liabilities)/number of shares outstanding
What is a close-end fund?
like common stock of company; underwriter of fund issues shares, number remains constant; no buying and selling; sold on secondary market; prices determined by supply and demand; must pay brokerage fee at purchase and time of sale
Why might a share's price of a close-end fund be below NAV?
fund has large built-in tax liabilities; is fund leveraged?; does the company invest abroad
what are "lifeboat" provisions?
if fund is too discounted, can force them to buy back shares or convert to an open-end fund?
What are the negatives of a close-end fund?
they trade like stocks incurring transactions costs; high commissions; bid/offer spread of the market on which the stock is traded is also a cost
What are the main differences between open-end funds and close-end funds?
open-end funds much larger; close-end funds high commissions + mostly bond funds
What is a unit trust?
number of shares fixed, typically invest in bonds, investor holds bonds until redeemed bu issuer; operation costs very low; fixed termination unlike open-end/close-end; portfolio stays the same; not popular in US; sales commission
What is the difference between indirect investment and direct investment?
indirect- mutual funds
direct- stock; bonds
What factors have led to the strong growth of mutual funds?
people being able to invest pensions, IRAs, annuities outside of company; tax deferral
What are the costs of a mutual fund?
1. shareholder fee/sales charge- 1-time fee for specific transaction (purchase, redemption, exchange)
2. expense ratio- annual fund operating expense
What are the two different ways of mutual fund distribution?
1. sales force (wholesale) distribution- intermediary buys and sells for you
2. direct- passive approach, just deposit money into mutual fund
What is a load?
sales charge for the agent-distributed fund
What is a front-end loan?
load is deducted initially from the amount invested by the client and paid to distributor
What is a no-load fund?
no sales charge; no sales agent; buying the fund at NAV
Why are load funds still around?
1. people depend on counsel
2. ingenuity in how fee is charged- back-end loads, level loads
What are level loads?
loads imposed uniformly each year
What is a CDSC?
contingent deferred sales charge (CDSC)- gradually declining back-end loan; "3,3,2,2,1,1,0"
What is the difference between A, B and C mutual fund shares?
A- front-end
B- back-end
C- level loads
What is a breakpoint?
amount of investment needed to earn a reduction in sales charge
What falls into a mutual funds operating expense/expense ratio?
1. management fee; investment advisory fee
2. distribution fee- 12b-1 fee; agent compensation, advertising fee, manufacturer marketing
custody/holding cash, transferring cash, independent-public accountant fees, director's fees
What is a 12b-1 fee?
fee for maintaining a fund; cannot exceed 1%; not for directly sold mutual funds; incentive to keep manager servicing/maintaining accounts after recieving front end load; max .75% distribution fee, max .25% service fee
What are the 3 largest funds?
Fidelity Magellan Fund
Vanguard S&P 500 Index Fund
American Income Fund of America Fund
Why do funds have multiple share classes?
more efficient and less costly than setting up 2 separate funds
What are the economic functions of financial intermediaries?
1. risk reduction via diversification
2. lower contract costs, processing information costs
3. professional portfolio management
4. liquidity
5. variety
6. payment mechanism
What are the different types of funds?
different caps; growth/value/blend; sector
What are growth stocks?
high price to book or P/E ratios
What are value stocks?
low price to value and P/E ratios
What differentiates bonds?
1. creditworthiness of issuer
2. maturity (duration)
3. municipal bonds- coupon interest is tax exempt
What do asset allocation, hybridm or balanced funds hold?
both stocks and bonds
What are money market funds?
maturities of one year or less; protect against inflation rate fluctuations
What are index funds?
they passively replicate an index
What are funds of funds?
invest in other mutual funds
What are the two most popular organizations that provide data on mutual funds?
Morningstar and Lipper
What are family of funds?
group of funds; people can change funds with little or no cost except if taxable
What does it mean when a fund is a Regulated Investment Company (RIC)?
must distribute 90% of net investment income earned; RIC companies are exempt from taxation on gains
Who pays taxes on funds?
investors pay capital gains/income taxes
What is a major negative of mutual funds?
lack of control over when capital gains tax is paid; even if only with fund for one day, must pay taxes on full year's worth of dividends and capital gains distributions
What did the Securities Act of '33 stipulate?
provides buyer information about issuer
What did the '34 Act stipulate?
must compy with transaction regulations; later extended to include: no false advertising, no insider trading
What did the '40 Act stipulate?
investment companies with 100+ shareholders must register with SEC; companies must provide periodice financial reports, disclose policies; cannot change policies w/o investor's approval; regulates companies + individuals who provide investment advice
What sort of fee regulations are there?
8.5% if max fee on total- front-end, back-end, as well as expenses like advertising
What does "prospectus simplification" mean?
prospectus must be readable
What are the structural components of a fund?
1. board of directors
2. mutual fund
3. investment advisor
4. distributor
5. external (accountant)/internal (marketing) departments
What are the types of 3rd party/intermediary mutual fund distribution are there?
supermarkets; mutual fund wrap-account programs; fee-based advisors; variable annuities; employer-sponsored pension plans, bank trust department
What are supermarkets?
types: Charles Schwab, TD, Fidelity
-offer no-load mutual funds from a number of different mutual fund companies
What are Wrap Programs?
service provided is asset allocation counsel; advice on a number of managed funds; asset-based fee
What are fee-based advisors?
independent financial planners who select investor's portfolio
What are variable annuities?
"mutual funds in an insurance wrapper"; sold through insurance agents
Why have US and international asset managers agressively aquired US funds?
rapid growth of US mutual fund business; deregulation; general regulatory framework in US
What are the alternatives to mutual funds?
1. Exchange-Traded Funds (ETFs)
2. Segregated Accounts
3. "folios"
What are ETFs?
portfolio that replicates the index and its returns;similar to close-end funds; trade like stocks on exchange; can trade ETFs at current prices throughout the day unlike mutual funds; also flexibile- can place limit orders, stop orders, orders to short sell and buy on margin; ETFs only subject to tax only when ETF sold at price higher than purchase price
What are Segregated Accounts?
for high-net worth individuals; allows investor to control taxes; managers earn higher fees because service costs are higher
What are folios?
portfolio with a particular investment strategy