2. Overview
- In this segment: Mutual Funds and Hedge Funds:
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- Size, structure and composition
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- Balance sheets and recent trends
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- Regulation of mutual funds
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- Activities of hedge funds
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- Size, structure and composition
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- Balance sheets and recent trends
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- Regulation of hedge funds
3. Mutual Funds
- Diversification opportunities enhanced for small investors
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- Predominantly open-ended funds
4. Mutual Funds
- Rapid growth in funds during the 1990s
- Slower rate of growth in the industry in early 2000s than in
1990s
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- Trading abuses contributed to slowdown
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- Almost 7,100 stock and bond mutual companies.
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- Total assets of $8.21 trillion.
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- 8,125 firms and $10.57 trillion if money market mutual funds
included
5. Size, structure and composition
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- First mutual fund: Boston, 1924.
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- Advent of money market mutual funds, 1972.
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- Total assets in stock and bond mutual funds:
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- 80 percent of retirement plan investments
6. Size, Structure and Composition
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- By asset size, mutual fund industry second most important FI
group.
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- Recent inroads by commercial banks and insurance companies
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- Mellon purchase of Dreyfus
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- State Farm (9,000 agents)
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- As of 2006, insurance companies managed approximately 10% of
mutual fund assets
7. Types of Mutual Funds
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- 2002, long-term funds dropped to 62.1% of assets, losing ground
to MMMFs
- Types of Long-term Funds:
8. Types of Mutual Funds
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- Taxable and tax-exempt MMMFs
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- Generally higher returns than bank deposits but uninsured.
- Impact of low interest rates during early to mid 2000s
9. Number of Mutual Funds 10. Interest Rate Spread and Net New
Cash Flow to MMMFs 11. Overview of Mutual Funds
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- Objectives (and adherence to stated objectives), rates of
return and risk characteristics vary.
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- Capital appreciation funds
12. Returns to Mutual Funds
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- Income and dividends of underlying portfolio.
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- Capital gains on trades by mutual fund management.
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- Capital appreciation in values of assets held in the
portfolio.
13. Web Resources
- For information on the performance of mutual funds, visit:
- Morningstarwww.morningstar.com
14. Types of Funds
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- Open-ended funds: comparable to most corporate securities
traded on stock exchanges.
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- Closed-end investment companies:
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- May trade at premium or discount.
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- Exchange traded funds (ETFs)
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- Load versus no-load funds.
15. Mutual Fund Costs
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- Generally, negative effect on performance outweighs
benefits
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- Short term versus long term investment alters impact of loads
on cost
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- Front end and back end fees
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- Class A, Class B and Class C differences
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- SEC creation of new rules
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- Sweeping decreases in fees, 2005 and 2006
16. Balance Sheet and Trends
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- Key assets are short-term securities (consistent with
deposit-like nature)
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- 2006: $1,514.9 billion (65.5% of total assets)
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- Most have share values fixed at $1 and adjust number of shares
owned by the investor.
17. Balance Sheet and Trends
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- Stocks comprised over 70.7 % of asset portfolios in 2006.
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- Credit market instruments 27.2% of asset portfolios
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- Shift to other securities such as credit market instruments,
U.S. Treasuries, municipal bonds etc. when equity markets not
performing as well.
18. Regulation
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- One of the most closely regulated among non-depository
FIs.
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- Emphasis on full disclosure and anti-fraud measures to protect
small investors.
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- NASD supervises mutual fund share distributions.
19. Regulatory Changes
- Prosecutions in light of trading abuses in early 2000s.
- Changes include: SEC requirements for independent board
members; reporting and disclosure requirements
20. Legislation
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- Securities Act 1933, 1934
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- Investment Advisers Act, 1940.
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- Insider Trading and Securities Fraud Enforcement Act of
1988.
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- Market Reform Act of 1990
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- Allows SEC to halt trading and introduce circuit breakers.
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- National Securities Markets Improvement Act of 1996.
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- Exempts mutual fund sellers from state securities regulatory
oversight.
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- Sarbanes-Oxley Act of 2002
21. Global Issues
- Worldwide growth in mutual fund investment not as great as in
the U.S.
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- $2.575 trillion in 1996 to $10.490 trillion in 2006
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- Larger returns in U.S.stock markets
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- Greatest development in countries with most advanced
markets
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- Opportunities from declining Japanese markets
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- Efforts to reduce barriers for U.S. mutual fund sponsors
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- China and other Asian countries
22. Hedge Funds
- Not technically mutual funds
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- Not subject to SEC regulation
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- Organized as limited partnership
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- Small number of sophisticated investors
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- Common feature is use of leverage
23. Hedge Funds
- Near collapse of Long-Term Capital Management
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- Precipitated SEC scrutiny of hedge funds
24. Types of Hedge Funds
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- Market neutral or value orientation
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- Moderate, consistent returns with low risk as objectives
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- Generally management fees and performance fees
25. Offshore Hedge Funds
- Major centers include Cayman Islands, Bermuda, Dublin,
Luxembourg.
26. Regulation of Hedge Funds
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- Exemption for less than 100 investors
- Scandals such as Canary Capital Partners
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- Illegal trading with mutual funds
27. Pertinent Websites
- American Fundswww.americanfunds.com
- Federal Reservewww.federalreserve.gov
- Fidelity Investmentswww.fidelity.com
- Investment Company Institutewww.ici.org
- Morningstar, Inc.www.morningstar.com
- Wall Street Journalwww.wsj.com