Under US law to sell a security to public Register with the SEC Disclose material information about the investments Prospectus Report periodically Why does it matter Transparency inner operations ID: 754882
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Slide1
Comparing Mutual FundsSlide2
Mutual Funds and Disclosure
Under U.S. law, to sell a security to public:
Register with the SEC
Disclose material information about the investments (Prospectus)
Report periodically
Why does it matter?
Transparency (inner operations)
Help investors to make an informed decision about a potential investment
Help investors to
make a comparisonSlide3
Disclosure and Mutual Funds
Mutual funds are securities that are offered to the
public every
day.
Therefore
, they must have a prospectus available every day.
They
issue a series of documents with varying levels
of detail
to meet the needs of different
investors.
The
summary prospectus
is a short document with highlights only.
The
prospectus
contains all material information that the SEC
believes is
needed for an investor to make an informed purchase decision.
The
statement of additional information
provides more detail.Slide4
Finding Fund Documents
Fund documents are available through:
The
management company’s web site
Most
online financial sites
(Morningstar,
Yahoo Finance,
etc
…)
EDGAR
system available on the SEC’s web site
Financial
provider sitesSlide5
Summary Prospectus: Overview
The summary prospectus:
Was
first used in May 2009.
Is
expected to become the primary disclosure document.
Must
be written in plain English.
Can
only be for one fund.
Has
eight sections
, which must appear in a specified order.Slide6
Summary Prospectus-Example
Fidelity
Stock Selector Mid Cap (FSSMX
)
http://
quicktake.morningstar.com/FundNet/SecFiling.aspx?Symbol=FSSMX&Country=usaSlide7
Summary Prospectus Sections (1)Slide8
Summary Prospectus Sections (2)Slide9
Summary Prospectus Sections (3)Slide10
Limitations on Mutual Fund NamesSlide11
Some Investment ObjectivesSlide12
Summary Prospectus Sections (4)Slide13
Summary Prospectus Sections (5)Slide14
Prospectus
Additional information in the prospectus includes:
Detail
on investment strategies and risks.
Information
on the time the fund calculates its NAV.
Information
on restrictions with regard to purchases
and sales
of fund shares, especially for
short-term trading
.
Detail
on sales charges.
A
financial highlights table
.
Fidelity Stock Selector Mid Cap (FSSMX)
http
://
quote.morningstar.com/fund-filing/Prospectus/2019/1/29/t.aspx?t=FSSMX&ft=485BPOS&d=56bf341f3d3741723c3bf8124745fb7b
SubadvisorsSlide15
Statement of Additional Information
Additional information in the statement of
additional information
includes details on:
The
board of directors.
The
portfolio manager(s).
Contracts
with service providers.
The
fund’s history
.
Fidelity Stock Selector Mid Cap (FSSMX)
http://
quote.morningstar.com/fund-filing/SAI/2019/1/29/t.aspx?t=FSSMX&ft=485BPOS&d=144068c99f1cbb001e89f53a7724f1ee
Salaries
Board members
Managers and other fundsSlide16
Shareholder Reports
Funds issue reports to shareholders at least
twice annually
. The annual and semi-annual
shareholder reports
usually include:
Portfolio
commentary, from the investment manager.
A president’s letter, from the chief executive of
the management
company.
Board
discussion of contract renewal, explaining why
the board
signed a contract with the management company.
Holdings
list.
Financial
statements, including the
statement of
operations
,
statements
of assets and liabilities,
and
statement
of changes
in net assets.Slide17
Fund Advertising
Fund
advertising is strictly regulated.
Restrictions
apply to anything sent out to promote a
fund, including
a fund sponsor’s entire Internet presence.
Fund
distributors must file all advertising material
with FINRA
within 10 business days of first use.
FINRA
reviews submissions to determine if they are fair
and balanced
and provide a sound basis for evaluating the fund.
Ads
may not be misleading.
FINRA can suggest changes, require revisions or issue
a “Do
Not Use” letter.
Ads
must present performance information in
a standard
format.Slide18
Understanding Mutual Funds
1) Investment Objectives
2) Risk
3) Sales Load
4) Performance Snapshot
5) Performance Analysis
6) Portfolio Manager Investment (SAI)Slide19
Evaluating Financial Needs and Investment Preferences
1) Liquidity needs
2) Time Horizon
3) Return Expectations
4) Risk Tolerance
Some examples:
https://
money.cnn.com/tools/assetallocwizard/assetallocwizard.html
https://
personal.vanguard.com/us/FundsInvQuestionnaire
https://
www.bankrate.com/calculators/retirement/asset-allocation.aspxSlide20
Understanding Categories
There are 4 main categories of mutual funds:
Money
market funds
Bond
funds
Stock
funds
Hybrid
funds
The categorization is based on the main type
of securities
a fund holds.Slide21
Money Market Funds
Money market funds:
Funds that invest in debt securities characterized by short maturities and minimal credit risk.
CDs
Commercia
l paper
U.S. treasuries
Bankers’ acceptances
Repurchase agreements
They are
the fund type that
is most like bank savings accounts, though they are not insured by
the federal government.
Pay
relatively low rates of interest (i.e., have a low yield).
Afford
a high degree of safety, because they generally
do not
decline in value.
Ordinarily
have a stable NAV of $1 per share.Slide22
Money Market FundsSlide23
After-Tax Yield
To compute the after-tax yield on a tax-exempt fund:
• Assuming:
Pre-tax
yield = 4.00%
Federal
tax bracket = 35.00%
State
tax bracket = 9.55%
State
taxes paid are deductible for federal income
tax purposes
.
Total
tax rate = 35.00% + 9.55% x (1 – 35.00%)
=
41.21%
After-tax
yield = 4.00% x (1 – 41.21%)
=
2.35%Slide24
Bond Funds
Bond funds:
Normally
pay a higher rate of interest than money
market funds
.
Do
not have the same level of security as money
market funds
; they can decline in value.
Have
a NAV that can vary from day to day.
Invest
in bonds.
These
are, in essence, loans to a government or a corporation
that promises
to repay the money with interest.Slide25
Bond Funds (1)Slide26
Bond Funds (2)Slide27
Bond Fund Indices
Corporate Bonds
Barclays Capital Intermediate U.S. Corporate Index
Barclays Capital Long U.S. Corporate Index
Barclays Capital U.S. Utility Bond Index
Emerging Markets Bonds
Barclays Capital EM Local Currency Government Capped Index
J.P. Morgan Government Bond Index Emerging Markets Global Core Index
Government Bonds
Barclays Capital Long U.S. Treasury Index
Barclays Capital U.S. 1-3 Year Government Bond Index
Barclays Capital U.S. Intermediate Treasury Index
High Yield Bonds
Barclays Capital High Yield Very Liquid Index
BofA
Merrill Lynch 0-5 Year US High Yield Constrained Index
Total Bond Market
Barclays Capital U.S. 1-5 Year Government/Credit Bond Index
Barclays Capital U.S. 5-10 Year Government/Credit Bond Index
Barclays Capital U.S. Aggregate Bond IndexSlide28
Stock Funds
Stock funds:
Generally
don’t provide much income.
Are
owned by investors who believe the funds’ NAVs
will appreciate
in value.
I
nvest
in stocks.
These
are, in essence, ownership positions in corporations.
– Small, Mid, Large, Mega
– Value, Growth, CoreSlide29
Stock FundsSlide30
Style Box
Style boxes classify funds in a grid along two dimensions.
They were
popularized by Morningstar. These dimensions are:
Investment
style
,which summarizes the types of stocks the
fund invests
in.
Value
= reasonably priced in relation to PE
Core
or blend = gravitates around index
Growth
= fast-growing companies
Market
capitalization
or
market cap,
which equals the
stock price
times the number of shares outstanding.
Large
Cap: $10 billion plus
Mid
Cap: $2 billion to $10 billion
Small
Cap: Less than $2 billionSlide31
Style Box Pros and Cons
Arguments for the style box classification:
It
allows investors to compare funds using similar approaches.
It
helps investors to diversify among funds with
different approaches
.
Arguments against the style box:
Funds
can move among style boxes as the market changes;
this is
not necessarily
style drift
.
Funds
that remain firmly within one style box may
miss opportunities
to make money.Slide32
Style BoxSlide33
Why does Fund Style matter?
T.Rowe
Instl
Large Cap (TRLGX) versus
T.Rowe
Instl
Small Cap (
TRSSX)Slide34
Why does Fund Style matter?
T.Rowe
Instl
Large Cap (TRLGX) versus
T.Rowe
Instl
Small Cap (TRSSX)Slide35
Why does Fund Style matter?
T.Rowe
Instl
Large Cap (TRLGX) versus
T.Rowe
Instl
Small Cap (TRSSX
)Slide36
Hybrid Funds
Hybrid funds:
Invest
in a combination of bonds and stocks.
Balanced
Funds
Asset
Allocation Funds
Target
Retirement Funds
Significant
debate about index and peer comparisonSlide37
Hybrid FundsSlide38
Hybrid FundsSlide39
Evaluating Fund Performance
Most
investors evaluate fund performance by
looking at
return and risk.
Return
is always
total return
.
Risk
is the variability in fund returns, usually measured
by the
standard deviation
in returns.
Most
investors use one of three methods
for comparing
funds:
Peer
group comparison.
Index
comparison.
Risk-adjusted
performance calculation.Slide40
Peer Group Comparison
A
peer group comparison
evaluates fund
performance relative
to other funds in the same subcategory.
These
funds form a
peer group
or
competitive universe
.
A fund is measured against a peer group in two ways:
The
fund’s return is compared to the average return.
The
fund’s return is ranked within the peer group.
Lipper and Morningstar are the primary providers
of peer
group information for all fund types
except money
market funds.
Lipper
and
iMoneyNet
are the primary providers for
money market
funds.Slide41
Index Comparison
An
index comparison
evaluates fund
performance relative
to a
market index
or
benchmark
.
A
market index is a hypothetical portfolio of
securities chosen
to represent the market or a segment of it.
Indexes
are maintained by independent firms.
Barclays
Capital, Dow Jones, J.P. Morgan, MSCI,
Russell Investments
and Standard & Poor’s are well-known
index providers
.
A fund’s return is compared to the index return.
If
the fund return is higher, the fund
outperforms.
If
the fund return is lower, the fund
underperforms.Slide42
Example
Artisan Value Investor (ARTLX)Slide43
Risk-Adjusted Performance Comparison
A
risk-adjusted performance comparison
evaluates
fund performance
relative to the risk that it is has taken.
Peer
group and index comparisons provide some
adjustment for
risk.
The best-known risk-adjusted comparison is
the Morningstar
star rating.
Fund
performance is divided by Morningstar’s
proprietary measure
of risk
.
The
results are ranked within peer groups
.Slide44
Active vs. PassiveSlide45
The Case for Index Funds
The
market is so efficient that it is impossible for
active managers
to outperform.
And
there’s no evidence that even the best actively-managed
funds persistently
outperform.
I
ndex
funds have an expense advantage.
They
are easier to manager and, therefore, can charge lower fees.
Lower
fees lead to better performance.
Index
funds are more tax-efficient.
They
trade securities less frequently, so they generate fewer
capital gains
.Slide46
The Case for Active Management
T
here
is a group of highly skilled, experienced managers
who consistently
outperform.
Active
managers tend to outperform in certain
market environments
.
Index
funds are building up large accumulated capital gains.
The
work of active managers is what makes the
markets efficient
.
Index
fund investors are
free riders
on the work of active managers.
Markets
are not as efficient as index fund proponents suggest.