©2003 McGraw-Hill Companies Inc. All rights reservedSlides by Kenneth StantonMcGraw Hill / Irwin

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5Chapter

The Financial Services Industry:

Mutual Funds

©2003 McGraw-Hill Companies Inc. All rights reservedSlides by Kenneth StantonMcGraw Hill / Irwin

5-2

Overview

In this segment ... Mutual Funds:• Activities of mutual funds• Size, structure and composition• Balance sheets and recent trends• Regulation of mutual funds• Global issues• Hedge funds*

©2003 McGraw-Hill Companies Inc. All rights reservedSlides by Kenneth StantonMcGraw Hill / Irwin

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Mutual Funds

Open-ended Closed-end End of 2000:

• More than 7,100 stock and bonds mutual companies.

• Total assets of $5.12 trillion.• 8,200 firms and $6.97 trillion if money market

mutual funds included

©2003 McGraw-Hill Companies Inc. All rights reservedSlides by Kenneth StantonMcGraw Hill / Irwin

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Size, structure and composition

• First mutual fund: Boston, 1924.• Slow growth, initially.• Advent of money market mutual funds, 1972.

» Regulation Q.

• Total assets in stock and bond mutual funds:» 1940: $0.4 billion.

» 1990: $568.5 billion

» 2000: $5,120.0 billion.

©2003 McGraw-Hill Companies Inc. All rights reservedSlides by Kenneth StantonMcGraw Hill / Irwin

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Size, Structure and Composition

• By asset size, mutual fund industry second most important FI group.

• Recent inroads by commercial banks and insurance companies

» Mellon purchase of Dreyfus

» State Farm (9,000 agents)

©2003 McGraw-Hill Companies Inc. All rights reservedSlides by Kenneth StantonMcGraw Hill / Irwin

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Types of Mutual Funds

Long-term funds (71.0% of assets, 2000)• Bond and income funds.• Equity funds.• Hybrid

Short-term funds (29.0% of assets, 2000)• Taxable and tax-exempt MMMFs• Generally higher returns than bank deposits but

uninsured.

©2003 McGraw-Hill Companies Inc. All rights reservedSlides by Kenneth StantonMcGraw Hill / Irwin

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Number of Mutual Funds

Year Equity Hybrid BondTaxable

MM

Tax-exempt

MM80 288 N/A 170 96 10

90 1,116 203 1,024 508 235

00 4,395 525 2,210 704 337

©2003 McGraw-Hill Companies Inc. All rights reservedSlides by Kenneth StantonMcGraw Hill / Irwin

5-8

Overview of Mutual Funds

• Objectives (and adherence to stated objectives), rates of return and risk characteristics vary.

Examples:• Aggressive growth funds• Growth funds• Precious metals• World

©2003 McGraw-Hill Companies Inc. All rights reservedSlides by Kenneth StantonMcGraw Hill / Irwin

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Returns to Mutual Funds

• Income and dividends of underlying portfolio.• Capital gains on trades by mutual fund

management.• Capital appreciation in values of assets held in the

portfolio.» Marked-to-market.

» Net-asset value (NAV).

©2003 McGraw-Hill Companies Inc. All rights reservedSlides by Kenneth StantonMcGraw Hill / Irwin

5-10

Web Resources

For information on the performance of mutual funds, visit:

Morningstar www.morningstar.com

Web Surf

©2003 McGraw-Hill Companies Inc. All rights reservedSlides by Kenneth StantonMcGraw Hill / Irwin

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Types of Funds

• Open-ended funds: contrast with most corporate securities traded on stock exchanges.

• Closed-end investment companies:• Fixed number of shares

» Example: REITs.

» May trade at premium or discount.

• Load versus no-load funds.

©2003 McGraw-Hill Companies Inc. All rights reservedSlides by Kenneth StantonMcGraw Hill / Irwin

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Mutual Fund Costs

Two types of fees:• Sales loads

» Generally, negative effect on performance outweighs benefits

• Fund operating expenses» Management fee

» 12b-1 fees

©2003 McGraw-Hill Companies Inc. All rights reservedSlides by Kenneth StantonMcGraw Hill / Irwin

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Mutual Fund Share Quotes

Quotes include:• Fund name, Objective, Minimum investment

required, Asset size, Maximum initial and exit sales charges, Annual expenses, NAV, Dividends , Quarterly earnings,

One-through five-year rating (A through E).

©2003 McGraw-Hill Companies Inc. All rights reservedSlides by Kenneth StantonMcGraw Hill / Irwin

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Balance Sheet and Trends

Money Market Funds• Key assets are short-term securities (consistent with

deposit-like nature)» 2000: $1,303.9 billion (71.9% of total assets)

• Many have share values fixed at $1 and adjust number of shares owned by the investor.

©2003 McGraw-Hill Companies Inc. All rights reservedSlides by Kenneth StantonMcGraw Hill / Irwin

5-15

Balance Sheet and Trends

Long-term Funds• Stocks comprise over 72.8 % of asset portfolios in

2000. • Shift to U.S. Treasuries, municipal bonds etc. when

equity markets not performing as well.

©2003 McGraw-Hill Companies Inc. All rights reservedSlides by Kenneth StantonMcGraw Hill / Irwin

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Regulation

• One of the most closely regulated among non-depository FIs.

• Primary regulator: SEC» Emphasis on full disclosure and anti-fraud measures to

protect small investors.

» NASD supervises mutual fund share distributions.

©2003 McGraw-Hill Companies Inc. All rights reservedSlides by Kenneth StantonMcGraw Hill / Irwin

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Legislation

• Securities Act 1933, 1934• Investment Advisers Act, 1940.• Insider Trading and Securities Fraud Enforcement

Act of 1988.• Market Reform Act of 1990

» Allows SEC to halt trading and introduce circuit breakers.

• National Securities Markets Improvement Act of 1996.

» Exempts mutual fund sellers from state securities regulatory oversight.

©2003 McGraw-Hill Companies Inc. All rights reservedSlides by Kenneth StantonMcGraw Hill / Irwin

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Web Resources

For details of regulation of securities firms and investment banks, visit:

SEC: www.sec.gov

NASD: www.nasd.com

Web Surf

©2003 McGraw-Hill Companies Inc. All rights reservedSlides by Kenneth StantonMcGraw Hill / Irwin

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Global Issues

Worldwide growth in mutual fund investment not as great as in the U.S.• $1,626 trillion in 1992 to $4,833 trillion in 2000

» 200% growth compared to 340% in U.S.

• Larger returns in U.S.stock markets• Greatest development in countries with most

developed markets• Opportunities from declining Japanese markets

©2003 McGraw-Hill Companies Inc. All rights reservedSlides by Kenneth StantonMcGraw Hill / Irwin

5-20

Hedge Funds*

Not technically mutual funds• Not subject to SEC regulation• Organized as limited partnership• Common feature is use of leverage

High returns in 1990s Near collapse of Long-Term Capital

Management• $3.6 million bailout