The beginnings of MIT are described in Chapter 2 ("A Brief History of Mutual Funds in the United States") of the extensive and comprehensive compendium of the mutual fund industry that you now hold in your hands. To the author's credit, the final chapters of Handbook of the Mutual Fund Industry squarely tackle these and other key issues.
Mutual Funds—
Big Business by Any Standard
Because of these advantages, mutual funds acquired an ever-increasing share in the state's financial assets. At the end of 2003, mutual funds reached the highest level of household financial assets at 18 percent, up from 10 percent ten years ago.
Mutual Fund Defi ned
The amount of these annuity payments (or a lump sum that the contract holder may choose to pay) varies based on the performance of the underlying securities. At the small and simple end of the range are investment clubs (such as the famous Beardstown Ladies).
Who Invests in Funds, and Why
Investment funds are easy to buy and sell, both directly from fund groups and through intermediaries such as brokers or fund supermarkets. In later chapters we will see some types of mutual funds that offer this wide range of choices.
There’s No Free Lunch, However
Weighing in on Mutual Fund Fees—Some Comments from Industry Figures Strategic Insight. a research and consulting firm in the mutual fund industry). While industry critics continue to draw attention to mutual fund fees, an SI study calculates that fund managers earn advisory fee income of less than.
The Structure of a Mutual Fund
A Brief History of Mutual Funds in the United States
The prosperity of the investment company industry can easily be contrasted with the unhealthy state of other financial services. Campbell1 An overview of the history of mutual funds in the United States explains many reasons why the industry is structured as it is today.
In the Beginning
British law in the late 1800s provided a favorable environment for pooled investment trusts, and by 1875 eighteen trusts similar to the Foreign and Colonial had been formed, with a total paid-up capital of over £6.5 million. Most mutual funds in this era were European because the pre-World War I United States was a debtor nation, with few domestic investments beyond those made by wealthy individuals.3 Nevertheless, a few vehicles similar to the British and Scottish mutual funds were , established in the United States around the turn of the century.
The Roaring Twenties and the Crash
This last feature, redemption on demand, became the hallmark of the American open-ended fund. While the Crash reduced the value of open-end funds as well, it also showed their strengths.
The Thirties: Depression and Regulation
State Road Research Investment Trust - The State Road Research Investment Trust battles MIT for the title of first open-ended fund. By 1929, closed-end funds accounted for over 95 percent of the industry's total assets of about $3 billion.
The Slow-but-Steady Growth Years: 1940 to 1980
Jack Dreyfus is certainly one of the most colorful individuals to grace the halls of mutual fund history. Johnson, II (Ed) first entered the industry during the 1920s as general counsel for Incorporated Investors (one of the first open-end fund companies), and later became a senior manager of the management company.
The Modern Industry Takes Off: Explosive Growth in the ’80s and ’90s
A Brief History of Mutual Funds in the United States 29 in 1979, the rapid growth of money market funds increased the total shareholder account to more than 21 million in 1983. Much of the flow of money into mutual funds during this period was due to America's increasing tendency to spend funds on pension savings.
The Early Twenty-First Century
Overview of Industry Structure
Recently, it appears that an even higher percentage is returned to the funds in the form of reinvestments. Directors are compensated by the funds for their services in looking after the interests of the shareholders.
The Funds
Specifically, it must have at least 25% of its assets in senior fixed income securities. Specifically, it must keep 80% of its assets invested in the specified type of securities.
Fund Directors
In an article in early 2004, Forbes found that directors' compensation at several prominent fund companies averaged between $139,000 and $285,000 per year.10 A fund's Statement of Additional Information (SAI) must disclose the amounts paid by the individual to directors. , make public. fund and the fund complex as a whole. Strategic Insights data indicates that director fees in 2003 were slightly more than $100 million for the industry.
The Management Companies
These fee arrangements have been the source of controversy and even litigation throughout the life of the industry. Direct – funds sold directly to the investor by the distribution arm of the management company, typically without load.
Third-Party Service Providers
Fund accounting keeps the books of the funds—assets, liabilities, income and expenses—in accordance with the provisions of the 1940 Act and subsequent regulations. Fund accounting is also one of the services that some management companies cover under a unit fee.
Brokers and Other Intermediaries
This formula, applied to the industry as a whole for 1998, yields an estimate of approximately $28 billion for what the industry paid to brokerage firms and other intermediaries to execute transactions. Most load funds compensate the intermediary who sells their shares through a front-end load, a commission that is deducted from the amount the investor pays.
The Industry Associations
Mutual funds managed by almost all management companies in the US belong to ICI. ICI staff collect data and analyze a wide range of issues relating to the industry.
The Regulators
The Mutual Fund—
The number of funds on the market grew by more than an order of magnitude during the last 20 years of the twentieth century. Most of the hundreds of books that have been published in recent years focus on the left and right sides of Figure 4.1 and ignore the middle.
Defi ning the Fund
This chapter sets the context for discussing the manufacturing component of fund management—the process of making and executing investment management decisions. At least one fund - the Women's Equity Mutual Fund - is trying to help women break through the glass ceiling.
The Prospectus
Most often, this variability is measured by the standard deviation of the difference between the fund's return and a benchmark - the risk-free return in the United States. The Fund must provide certain information for each class of the Fund's shares.
Categories of Funds
Global bond short-term funds invest in worldwide debt securities and have an average maturity of one to five years. National municipal bonds – short-term funds invest predominantly in municipal bonds and have an average maturity of one to five years.
Approaches to Investment Decision Making
This is the crux of the issue that divides proponents of active and passive management. The next few paragraphs describe some of the more important methods active managers use to select securities and construct their portfolios.
Implications for Operations
For example, the C/funds employ an asset allocation strategy that shifts holdings between stocks and fixed income securities according to forecasts of economic conditions. For example, accounting entries for bonds differ from those for stocks, and foreign securities require different accounting than domestic issues.
The Investment Management Cycle
These front office activities are the main factors that determine how well a fund performs relative to the market. Investment Management Front Office 85 shapes the market through thoughtful selection of securities and efficient trading.
Investment Analysis and Portfolio Management
These yields, plotted against time (typically for Treasuries with maturities ranging from three months to 30 years), combine to form the Treasury yield curve—the basis of the entire U.S. One of the reforms included in the 1940 law was actually a requirement that trust holdings be disclosed.
Trade Order Management
Which method the fund trader chooses depends on the size of the order and the technology used by the fund's investment adviser. Buy-side companies, such as mutual funds, may also receive research services (which are broadly defined to include not only information but also computer hardware and software that support research) from the broker in exchange for a portion of the commissions, generated by fund trading. business.
The Cost of the Front Offi ce
The advisor must be able to demonstrate that the total amount paid to the broker is reasonable compared to the total value of the services (trade execution plus research) provided by the broker. The first part of the active versus passive argument focuses on these consultancy costs.
Life in an Investment Management Front Offi ce
The role of the fund's traders is different now than it was ten years ago.” Carrying out or supervising all these activities falls under the responsibility of asset management.
Back-Offi ce Players
The custodian holds the fund's securities in custody and manages the cash movements involved in the settlement of trades and income payments. At one time, many of the fund's securities holdings took the form of physical certificates and the custodian kept them in its vault.
After the Trade Is Made—The Settlement Process
After receiving the delivery details from the investment adviser, the broker (in the case of our listed shares example) communicates these to the Depository Trust Corporation (DTC) in the form of a confirmation. Exchange Exchange matches both sides of the trade and submits the trade as closed to NSCC.
Portfolio Compliance and Risk Monitoring
These types of violations are detected by periodically checking whether the fund positions violate the rules. By early 1993, Bruntjen had invested nearly 60 percent of the fund's assets in three types of mortgage-backed derivatives:11.
The Cost of the Back Offi ce
The management company, like the contract administration, functions within a composite figure. Strategic Insight reported that custody fees in 1998 averaged only about two basis points for all funds.
The Back Offi ce at David L. Babson
Fund Accounting, Audit, Legal, and Other Support
The primary concern of the 1940 Act is the integrity, accuracy and security of the investment portfolios and activities of mutual funds. One aspect of that concern is the attention the law pays to the financial and other documents of funds and to their external auditors.
Fund Accounting
Fund directors must set the time during the day for calculating NAV [Rule 22c-1(d)], but for all practical purposes funds do this between the time the NYSE closes (4:00 p.m.) and the deadline to get prices to NASDAQ (5:50 p.m.). Where necessary, they make changes to the inventory of cash and securities maintained in the fund accounting system.
A Day in the Life of a Fund Accountant
Again, he looks at the effect on the NAV for each component of the fund's books. For the emerging market debt fund, he finds an NAV impact due to a change in the value of the currency futures.
Fund Audit
The auditor reviews the fund's compliance with requirements of the tax laws, especially those that allow pass-through status. Fund Accounting, Audit, Legal and Other Support Functions 149 to suspend further sales of the fund's shares.
Fund Legal Support
Therefore, fund management must practically correct any deficiencies that the fund's auditor believes represent a material departure from GAAP. As a result, the Fund's attorneys may recommend that the Fund seek a written opinion from the SEC to ensure that the matter does not come under regulatory scrutiny at a later date.
Other Fund Administration Functions
Fund Distribution
Today, investors can purchase funds through a wide variety of intermediaries, as well as directly from the fund companies. They may or may not pay sales commissions, and if they do, they may pay them when they buy the fund's shares, when they sell them, and/or periodically while holding the fund.
Overview of Fund Distribution
Without cash generated from fund sales, a fund would have to liquidate portfolio holdings to meet redemptions, thereby preventing the manager from pursuing the fund's investment objective. Second, management companies generally want their funds to continue to grow, as investment advisory and other management fees rise along with the value of the fund's assets.
The Evolution of Mutual Fund Distribution
Some fund companies labeled their funds "no load" even though they deducted substantial 12b-1 fees from shareholder accounts to compensate the brokers. In 1993, the SEC banned any fund from closing. itself "no load" if it rates a 12b-1 fee greater than 25 basis points.
Underwriters, Distributors, Wholesalers
For example, the dealer is held responsible for determining that the investment in the fund is suitable for the investor. The agreement defines the dealer's responsibilities for executing transactions in the fund's shares.
Load Fund Distribution Via Brokers
They perform such functions as scheduling appointments for the external wholesalers, sending information to brokers, organizing seminars and helping to keep the field force updated on developments in the funds. Regardless of whether they are selling their own funds (proprietary) or someone else's (non-proprietary), the broker's role is the same - to get the individual investor to buy shares in the fund.
Load Schemes and Broker Compensation
The commission amount is typically expressed as a percentage of the fund's offer price, which is the NAV adjusted for the commission. This erosion is reflected in the response one Prudential broker made to the announcement that Prudential would use third-party distribution for its funds: “The average broker here doesn't sell a lot of internal funds, so if someone else wants to sell them, more power to them. ”19 And industry guru Lou Harvey believes that the proprietary channel will eventually disappear.
Connecting Brokers and Funds: NSCC’s Fund/SERV
However, developing proprietary, one-time computer connections would require vastly more time and money from both the funds and the brokers than connecting to Fund/SERV. DST Janus Funds Goldman Funds Calvert Funds American Funds Figure 8.7 Participants and functions of the NSCC fund/SERV.
Issues in Broker Distribution
Example Expenses help you compare the cost of investing in the fund to the cost of investing in other mutual funds. The table does not take into account any cost savings schemes discussed in the footnotes to the table of the fund's annual operating costs.
