2014-02-12

Indirect Investing
10%: Monitor 10 stocks and predict what will happen within 3months.
Indirect investing:
o Indirect investments are regulated, but not guaranteed.
o Pa a !ee !or a middle"man help ou to invest
#roker, advisors, investment compan
o Investment companies that act as a conduit to invest:
1. Closed-end company
a. $he oldest tpe
b. %sset under management: & '3( million
'. Open-end company )mutual !und*
a. $he largest in terms o! mone
b. +egulated )can still loose mone* b the government
c. %sset under management: &11., trillion
d. Passed through entit, take out a !ee !rom the dividend
i. Problems with ta-es
3. ETF ).-change $raded /und*
a. $he !astest growing
b. 0tarted in 1113
i. $a- e!!icient
c. %sset under management: &1.1 trillion
2. 3nit investment trust
a. 0mallest in terms o! market shares
Status Share Count Exchange
Traded?
Active or
assive?
1. Closed-end 4ldest /i-ed 5es %ctive6
!. Open "mutual# 7argest 8ariable 9o %ctive6
$. ETF /ast growing 8ariable 5es Passive6
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6 $erms to understand:
%ctive: analsts doing signi!icant research, e-ample
o :ho will ou give &10 in the class; <o research b looking at test scores etc.
Passive: do not need to test the product*
o :ho will ou give &10 in the class; .verone mutuall.
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1. C%OSE&-E'&
It has a !i-ed amount o! shared outstanding.
o :hen a compan comes out with '0mill shares, then it won=t change.
$he are e-change traded on the 950. etc.
It is an active investment
o Prices are constantl changing with the market
'. ETF "E(C)A'*E T+A&E& F,'&S#
$he shares var, and can go up and down in terms o! how man there are.
.-change traded on the 950. etc.
>rowing because the are cheap, because the are passive.
o $he are ta- e!!icient
o 7ow cost in terms o! !ees and e-penses because port!olios are unmanaged
I! ou want to go into investments or ?ust invest our own mone, consider .$/
3. OE'E&-E'&
$he share varies, and can go up and down in terms o! how man there are.
$he are not e-change traded@ ou bu and sell !undsAstocks trough the broker.
o Its bought and sold back to the investment compan.
It is an active investment@ have to do a lot o! research.
o It could be a passive investment, than it is called an index.
Mutual !unds have a board management
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o $he have an ob?ective !or investment policies
Individual investment companies:
o +e!erred to as B!und comple-esC or B!und !amiliesC
o 8anguard, /idelit etc.
:h would the want more assets under management;
Dompanies are compensated as a percentage o! assets
#ene!its o! mutual !unds:
1. Instant diversi!ication
'. Pro!essional management
3. Donvenience
2. 0ervices
,. Dosts generall low )0.10 " '% charge*
+esearch shows that lower !ees, the mutual !unds are better
.-ample o! !ee:
Day 1 Day 365
&100 10E Invisible
'% " '
10F 8isible
Mutual !unds are bought and sold directl !rom a !und compan or indirectl !rom a
sale agent, at securit !irms, banks etc.
Investors can redeem the mutual !und antime.
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Types o- .utual Funds
Mone market !unds
0hort term, high Gualit
Money market funds (MFFs) are open"end investments that consist o!
mone market instruments
o 9o sales charge
o 1"' months average maturit
o 3suall ta-able !unds
o #road diversi!ication
o .asil liGuidated
/i-ed incomeAbonds
7ong"term investments
o
0tockAeGuit
7ong"term investments
8alue mutual !und:
o Donsidered cheap as !ar as PA. +atio, PA#
o 0todg and old compan=s
Hohnson and Hohnson, Doca"Dola, %$I$
o PA. +atio o! &'"30
o 5ou might want to have stocks in both value and growth.
8alue stock is considered conservative.
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>rowth mutual !und:
o Dompanies that have !ast growing .arnings Per 0hare
$witter, >oogle, #iotech
o PA. ratio o! &30"1,000
o 5ou might want to have stocks in both value and growth
>rowth stocks might go bad when econom is bad
Inde- !und:
o Mutual !unds that are designed to replicate a market inde- as 0IP
o It=s an unmanaged port!olio with low e-pense ratio
Jbrid )stock and bond*
7ong"term investments
>lobal /unds
o % mi- o! 3.0 and international stocks
o %t least ',% in 3.0. stocks
International /unds
o 9on 3.0. stocks
0ingle"countr !unds
o Doncentrate on securities o! a single countr
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.utual -unds have load or no load "Fees and Expenses#
Fee is a direct charges
o Including +edemption !ee, e-change !ee, loaded !und
o 7oaded !und: % sales !ee )commission* !or the cost involved in selling the
!unds to the investor, about ,.(,%
/rontend loads: Pa commission !irst da
#ackend load: Pa commission when ou take it out
Investors think these mutual !unds is better than others
o 7ong"term investors
%ll !ees could be !ound in the prospectuses, which provides
in!ormation about an IP4 o! securities to potential buers
o Dlass % 0hare:
/ront"end sales charge
%nnual 1'b"1 !ee
o Dlass # 0hare:
+edemption !ee that declines overtime
o /ee will disappear i! the shares are held long enough ),"F ears*
:hen the !ee disappears it is turned into Dlass % 0hare
o Dlass D 0hare:
9o !ront"end !ee
Jigher 1'b"1 !ee
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<istribution !ee us lower
Expense is an indirect charge:
o .-pense ratio K <istribution !ee L %nnual operating e-pense
o It=s a !ee that ou pa GuarterlAannuall !or our port!olio
9o load !und K 9o sales charge )commission*
'et Asset /alue o- a .utual Fund
NAV = Market Vaue of a fund!s se"urities # $ia%iities
Num%er of in&estor s'ares outstandin(
$he per share value o! the securities in an investment compan=s port!olio
o BJow much is one share worth in the port!olioC
Domputed dail a!ter the stock market close at 2pm in 95D.
0nvestment Company er-ormance
Jow to measure per!ormance in a mutual !und:
Total +eturn
o 7ook at the 0IP ,00, representative o! ,00 companies in the 30
o Jow can one inde- be up more than another;
#ecause o! the dividends that the companies pa
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$he total return K Price change L dividends
.orningstar +atings
o , star rating sstem
, stars is the highest rating
1 star is the lowest rating
o % predictor o! !uture success
o #ut, it includes 'istori"a risk"ad?usted per!ormance !or !unds that have at least
a three"ear histor
o It takes a !und=s risk into account relative to its categor as a whole
1enchmar2s
o It is important that mutual !unds use some tpe o! benchmark to compare
investment alternatives.
o 7ess than ',% o! mutual !unds outper!ormed their benchmarks though.
0mportant issue concerning mutual -unds
o Survivorship 3ias: is the bias resulting !rom the !act that analMing a sample
o! investment companies at a point in time re!lects onl those companies that
survived, ignoring those that did not.
%nnual return is overstated b about 1.F% due to weak !unds having to
merge with other ones etc.
Aerometric +eturn
o
*eometric return
o Is a hpothetical rate o! return used b mutual !unds that )i! achieved annuall*
would have produced the same cumulative total return i! per!ormance had been
constant the entire period
%lso called the A&era(e Annua )ota *eturn
o It re!lects the compounded rate o! growth
Fund Supermar2et
o It is where investors can bu, own, and sell the !unds o! various mutual !unds
!amilies through one source, such as a brokerage !irm.
o It allows the investors to choose !rom a large set o! mutual !unds through their
brokerage account
)edge Funds
o $hese are unregulated companies that seek to e-ploit various market
opportunities and thereb earn larger returns than are ordinaril available to
interment companies
+eGuires a large initial investment
$he do not disclose in!ormation to investors about their investing
activates
$he charge substantial !ees o! the pro!its earned, usuall '0%