1,Mutual Funds, Hedge Funds and Pension Funds (Ch 5 Textbook by Saunders et al),Outline Mutual Funds 1.1 Quick Facts of MFs 1.2 Advantages 1.3 Types 1.4 Structure of MFs 1.5 Expenses 1.6 Regulations Hedge Funds Pension Funds Defined Contribution Plan Defined Benefit Plan. Numerical Examples Concluding remarks,2,1.1 Quick Facts of Canadas MF Industry Assets Growth 1990, $25-billion. 2019, $426-billion. 2019, $391-billion. 2019, $497.2-billion (See next Slide) Aging of the baby boomers and increasing life expectancy Entry of banks into the mutual fund market Professional management and diversification at minimalcost 1990s years of lower interest rates and strong equity markets Over 25% return on 1993, 2019, and 2019, 2019 75 MF management companies. (2019) Market share of the top 10 MF companies accounted for 77.9% of all assets in 2019. 111 dealer firms involved in the sale of MFs. 1,915 MFs being sold,3,Growth of Mutual Funds,4-3,4,Mutual Fund Net Assets in billions,Source: The Investment Funds Institute of Canada,5,Net Sales by Fund Typelong-term funds only (millions),Source: The Investment Funds Institute of Canada,6,1. MUTAL FUNDS What is a Mutual Fund? A MF is a separate, legally incorporated, equity-financed investment vehicle managed by an asset manager for the benefit of the equity investors. A MF pools the resources of many small investors by selling them shares and using the proceeds to invest in securities (e.g., stocks, bonds, options, futures, currencies, or money market securities. ),7,Mutual Funds,Big Six Banks subsidiaries. MF of $165.2-billion (1/3 of total in 2019),8,1.2 Advantages of investing in MF Record keeping and administration Diversification and divisibility (see graph on the advantages of global diversification) Professional Management Lower Transaction Costs,9,1.3 Types of MFs Equity Funds: Value Firms: High dividend yields Fixed-Income (bond) Funds Balanced Funds (money market, equity and bonds) Growth Funds: Growth firms. Specialized Funds: Specific economic sectors, and regions Money Market Funds: T-bills, BAs, term deposits, provincial short-term notes, commercial paper. Index Funds. They try to replicate an index. Example: S&P/TSX 60 index fund. Index funds are passively managed funds, in contrast, types 1-6 are actively managed funds.,10,Types of Mutual Funds,4-10,11,Vanguard 500 Index Fund Investor Shares (VFINX) Average Annual Total Returns as of 03/31/2019,Ten Largest Holdings as of 04/30/2019 1. General Electric Co. 2. Microsoft Corp. 3. Exxon Mobil Corp. 4. Pfizer Inc. 5. Citigroup, Inc. 6. Wal-Mart Stores, Inc. 7. American International Group, Inc. 8. Intel Corp. 9. Bank of America Corp. 10. Johnson & Johnson Top Ten Equals 22.4% of Total Net Assets,12,Vanguard 500 Index Fund Investor Shares (VFINX) Average annual performanceAs of 04/30/2009,13,International Diversification & Risk,Portfolio of Canadian and international stocks,By diversifying the portfolio, the variance of the portfolios return relative to the variance of the markets return (beta) is reduced to the level of systematic risk - the risk of the market itself.,Portfolio of Canadian stocks,12%,27%,Percent risk,14,1.4 Structure of MF Open-end Fund (most common). Mutual fund in which shares can be redeemed at any time at a price that is tied to the NAV (at the end of the day). No set number of shares outstanding. The number may go up or down each day as new investments (purchase) arrive or as redemptions (sales) occur. Closed-end Fund. An unmanaged portfolio of stock with each share representing partial ownership of the portfolio. A fixed number of no redeemable shares are sold at an initial offering and are then traded in organized exchanges like common stock. The market price of these shares depend on the interaction of demand and supply for these funds,15,Investors buy shares in MF and ownership is proportional to the number of shares purchased. The value of each share is called the net asset value or NAV. NAV = Market value of assets minus liabilities Shares Outstanding. E.g., The Balance Sheet of the Index Trust 500 a mutual index fund sponsored by the Vanguard Group at the end of Dec 2019 was as follows. Assets (Cash, bond and stocks at current market value): $105, 496 million. Liabilities: $844 million. # Shares: 773.3 million. Determine the NAV A: NAV= ($105,496 million - $844 million)/773.3 million = $135.38,16,A mutual fund is usually called an open-end fund because the number of shares increases (decreases) with new purchases (redemptions) of mutual fund shares. EXAMPLE Assume that at the beginning of a day a MF has a Net Assets (NA0) portfolio of $100 million, and shares outstanding (units) of 5 million. a) What is the NAV of the fund? Assume that during the day the mutual fund sold $600,000 of fund shares (units) and unit holders withdrew (redeemed) $200,000, and the prices of all the securities in the portfolio remain constant. b) How many shares (units) were issued (sold)? c) How