Series 65 Pooled Investments

An investor interested in obtaining the benefit of professional portfolio management has been tracking a particular investment company for the past several months. In so doing, it becomes obvious that the market price of the shares moves in direct relation to the computed NAV. This investor must be following

Because closed-end funds trade in the secondary markets, their price is determined by supply and demand. On the other hand, open-end investment companies (mutual funds) always trade based on their NAV. Although money market funds are open-end, the market price of their shares doesn't move. Additionally, when the exam uses an adjective to describe a fund (balanced, common stock, etc.), it is always an open-end company (mutual fund). LO 3.b

Investors with a short time horizon most likely will invest in which class of mutual fund shares?

Class C shares may be less expensive than Class A or B shares for investors with a short time horizon. The front-end load on Class A shares and the back-end load on Class B shares make them unattractive for short-term investors. Class A shares do not convert to Class B shares; it goes the other way.

Programs allowing for the direct pass-through of losses and income to investors include all of the following except

REITs allow for the direct pass-through of income but not losses. The other choices are forms of business that allow for pass-through of income and losses.

Which of the following least accurately describes hedge funds?

Hedge funds are unregulated pooled investment vehicles with limited transparency. Because of the lack of transparency, they are generally only marketed to accredited investors. This is because they are considered too risky for investors who are less financially sophisticated. Minimum initial investment levels are usually high. Hedge funds can use sophisticated techniques such as short selling, leverage, and derivatives. LO 3.e

Which of the following is not a characteristic of hedge funds? Hedge funds

Hedge funds attempt to attract the top managers because they offer performance-based fees, which vary based on fund performance. The typical fee structure is 2% + 20% where 2% is the fixed fee and 20% of the profits is the performance portion. The other choices are true. You can assume that any hedge fund on the exam is organized as a private limited partnership and is not registered on the federal or state level. One of the reasons hedge funds are considered alternative investments is that a portion of their portfolio generally consists of alts, such as private equity and structured products. Unlike mutual funds, hedge funds can use leverage and sell short. In addition, it is not unusual to find as much as 25 to 30% of the hedge fund's portfolio concentrated in the securities of a single issuer.

When an agent explains mutual funds to a prospective investor, which of the following statements may be made?

Mutual fund redemption values fluctuate according to the value of the securities in the portfolio. The tax liabilities associated with mutual fund switching may not be glossed over. While the redemption rules of the Investment Company Act of 1940 do make mutual funds liquid, investors are not guaranteed to receive an amount equal to the original investment.

Open- and closed-end investment companies have all of the following in common except

Open-end companies do not trade shares in the secondary market. However, both open-end and closed-end companies compute their net asset values, actively manage their portfolios, and have stated investment objectives.

One of your clients is interested in investing in a large-cap growth fund and has a list of several that she has been investigating. When helping her compare, each of the following factors would be relevant except

Tenure of the fund manager, expense ratio, and performance relative to a benchmark are all relevant factors to use when comparing mutual funds. However, the date that dividends are paid is not a significant factor.

In a mutual fund portfolio, you might find all of the following except

a short stock position.

An individual seeking capital and possible guidance with a start-up would most likely seek funding from

a venture capital fund. A venture capital fund, typically organized as a limited partnership, seeks out opportunities to get in on the ground floor. In additional to an ownership position, usually at least 10%, the venture capitalists provide managerial input. Because these start-ups are rarely publicly traded, they are of little interest to the other investment company choices. LO 3.d

In the context of purchasing shares in a mutual fund, the term breakpoint refers to the point at which

the dollar amount of shares being purchased qualifies the investor for a lower sales charge.

Among the characteristics of exchange-traded funds (ETFs), what distinguishes them from mutual funds is that

they are traded on listed exchanges. One of the main distinctions between ETFs and mutual funds is in their name—exchange-traded. No mutual funds trade on exchanges. Both ETFs and mutual funds compute NAV daily, and there are index mutual funds that are managed to mimic an index in the same way most ETFs are. Both ETFs and mutual funds are registered with the SEC.

Louis owns an investment that is an unmanaged portfolio in which the money manager initially selects the securities to be included in the portfolio and then holds those securities until they mature or the investment portfolio terminates. This statement best describes which type of investment?

A unit investment trust (UIT) is a type of investment company whose units are sold in the secondary market and is generally unmanaged or passively managed. The trust manager initially selects the securities to be included in the portfolio and then holds those securities until they mature or the UIT terminates.

Which of the following statements correctly expresses requirements under the Investment Company Act of 1940?

No investment advisory contract may be entered into that does not provide for termination with no more than 60 days' notice in writing. One of the provisions of the Investment Company Act of 1940 is that the maximum permitted termination notice is 60 days in writing. The custodial bank does not need FDIC coverage (this is not your local bank account) and the 3% limit is the maximum, not a minimum. In order to renew the advisory contract, it is either a majority vote of the fund's directors or by a vote of a majority of the outstanding voting securities of the fund. LO 3.a

When comparing the pricing of open-end investment companies with that of closed-end investment companies, it is correct to state that

only the open-end bases its price on the next computed NAV per share.The pricing of open-end shares (mutual funds) is based on the next computed NAV per share (forward pricing), while closed-end shares (CESs) trade based on supply and demand. There is no correlation between share prices and fund structure. Only the open-end must perform a daily NAV computation; closed-end funds may compute daily, but many do it only weekly. It is correct to state that closed-end funds can issue preferred stock in addition to common stock and open-end funds can only issue one class of stock, but that has nothing to do with comparing the pricing of the two.