Chapter 4

Chapter Four
Mutual Funds and Other Investment
Companies

INVESTMENTS | BODIE, KANE,
MARCUS

Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Investment Companies
• Pool funds of individual investors and invest in a wide range of securities or other assets
• Services provided:
• Record keeping and administration
• Diversification and divisibility
• Professional management
• Lower transaction costs
4-2

INVESTMENTS | BODIE, KANE,
MARCUS

Net Asset Value
• Net Asset Value (NAV) is the value of each share in the investment company
• Calculation:

4-3

INVESTMENTS | BODIE, KANE,
MARCUS

Types of Investment
Companies

Investment
Company
Assets Under
Management,
2011 ($ Billion)

4-4

INVESTMENTS | BODIE, KANE,
MARCUS

Unit Investment Trusts
• Fixed portfolio of uniform assets
• Unmanaged
• The sponsor sells redeemable trust certificates to investors • A bank or trust company manages the trust
• Total assets have declined from $105 billion in 1990 to $60 billion in 2012

4-5

INVESTMENTS | BODIE, KANE,
MARCUS

Types of Investment Companies
• Managed Investment Companies
• Open-End
• Fund issues new shares when investors buy in and redeems shares when investors cash out
• Priced at Net Asset Value (NAV)

• Closed-End
• No change in shares outstanding; old investors cash out by selling to new investors
• Priced at premium or discount to NAV
4-6

INVESTMENTS | BODIE, KANE,
MARCUS

Other Managed Investment
Companies
• Commingled funds
• Partnerships of investors pooling their funds

• REITs
• Mortgage REITs
• Equity REITs

- invest in loans
- invest in real estate directly

• Hedge Funds
• Accessible only to accredited investors http:// www.sec.gov/investor/alerts/ib_hedgefunds.pdf • Significantly less regulated
4-7

INVESTMENTS | BODIE, KANE,
MARCUS

U.S. Mutual Funds by Investment
Classification
Can specialize in:
• A sector
• Track an index
• Growth or value