Chapter 4 investments
Would you expect a typical open-end fixed income mutual fund to have a higher or lower operating expenses than a fixed-income unit investment trust? Why?
An open-end fund will have higher fees since they are actively marketing and managing their investor base. The fund is always looking for new investors. A unit investment trust need not spend too much time on such matters since investors find each other.
The new Fund average daily assets of $2.2 billion in the past year. The fund sold $400 million and purchased $500 million worth of stock during the year. What was its turnover ratio?
The excess of purchases over sales must be due to new inflows into the fund. Therefore, $400 million of stock previously held by the fund was replaced by new holdings. So turnover is:400m / 2.2b = 18.18%
Reconsider the Fingroup Fund in the previous problem. If during the year the portfolio managers sell all of the holdings of stock D and replaces it with 200,000 shares of stock E at $50 per share and 200,000 shares of stock F at $25 per share, what is the portfolio turnover rate?
The value of stocks sold and replaced = $15,000,000.Turnover rate = Value of stocks sold or replaced / Value of assets= $15,000,000 / $42,000,000 = .3571 = 35.71%
The composition of the Fingroup fund Portfolio is as follows: Stock shares price A 200,000 $ 35 B 300,000 40 C 400,000 20 D 600,000 25 The funds has not borrowed any funds, but its accrued management fee with the portfolio manager currently totals $30,000. There are 4 million shares outstanding. What is the net asset value of the fund?
$10.49NAV= market value of assets - liabilities / shares outstanding(35 x 200,000 + 40 x 300,000 + 20 x 400,000 + 25 x 600,000) = Total market valueTMV = 42,000,000liabilities/fees= 30,00042,000,000 - 30,000= 4,000,000shares outstanding= 4,000,000NAV= (42,000,000 - 30,000) / (4,000,000)NAV= 10.49
An open-end fund has a net asset value of $10.70 per share. It is sold with a front-end load of 6%. What is the offering price?
$11.38Offering price= NAV / (1-load)NAV= 10.70Load= 6%10.70 / (1-0.06)= 11.38
Loaded-up Fund charges a 12b-1 fee of 1% and maintains an expense ratio of .75%. Economy Funds charges a front-end load of 2%, but has no 12b-1 fee and expense ration of .25%. Assume the rate of return on both funds' portfolios (before any fees) is 6% per year, How much will an investment in each fund grow to after: a. 1 year? b. 3 years? c. 10 years?
1 year: Load up fund: $104.25 economy fund: $103.643 year Load up fund: $113.30 economy fund: $115.9010 year: Load up fund: $151.62 economy fund: $171.41 dollar investment= initial x (1- front or back end) x (1+ for - expense or 12b1 fees) ^ # of years load: = 100 x (1-0) x (1 + 0.06 - 1% + .75%) ^number of year year 1 = 100 x (1-0) x (1 + 0.06 - .0175) ^ 1= $104.25year 3 = 100 x (1-0) x (1 + 0.06 - .0175) ^ 3year 10 = 100 x (1-0) x (1 + 0.06 - .0175) ^10 economy fund = 100 x (1- 0.02) x ( 1 + 0.06 - .25%) ^ # years year 1= 100 x (1- 0.02) x ( 1 + 0.06 - .0025) ^ 1= $103.64year 3: 100 x (1- 0.02) x ( 1 + 0.06 - .0025) ^ 3year 10: 100 x (1- 0.02) x ( 1 + 0.06 - .0025) ^ 10
What is a 12b-1 fee?
12b-1 fees are annual fees charged by a mutual fund to pay for marketing and distribution costs.
You purchased 1,000 shares of the New Fund at a price of $20 per share at the beginning of the year. You paid a front-end load of 4%. The securities in which the fund invests increase in value by 12% DURING THE YEAR. The fund's expense ratio is 1.2%. What is your rate of return on the fund if you sell your shares at the end of the year?
6.37%1000 x $20= $20,000/(1-.04)= 20,833.33~>Shares increase from $20,000 to...$20,000(1.12-.012)= $22,160~>Rate of Return= (22,160-20,833.33)/20,833.33= 0.0637== 6.37%
What are some differences between a unit investment trust and a closed-end fund?
A unit investment trust is an unmanaged mutual fund. Its portfolio is fixed and does not change due to asset trades, as does a close-end fund. Investors who wish to liquidate their holdings of a unit investment trust may sell the shares back to the trustee for net asset value, while a close-end fund is traded on the open market.
Balanced funds and asset allocation funds invest both the stock and bond markets. What is the difference between these types of funds?
Asset allocation funds may dramatically vary the proportions allocated to each market in accord with the portfolio manager's forecast of the relative performance of each sector. Hence, these funds are engaged in market timing and are not designed to be low-risk investment vehicles.
Why can closed-end funds sell at prices that differ from net value while open-end funds do not?
Close-end funds trade on the open market and are thus subject to market pricing. Open-end funds are sold by the mutual fund and must reflect the NAV of the investments
What are the advantages and disadvantages of exchange-traded funds versus mutual funds?
Exchange-traded funds can be traded during the day, just as the stocks they represent. They are most tax effective, in that they do not have as many distributions. They have much lower transaction costs. They also do not require load charges, management fees, and minimum investment amounts. The disadvantage is that ETFs must be purchased from brokers for a fee. Moreover, investors may incur a bid-ask spread when purchasing an ETF.
What are some differences between hedge funds and mutual funds?
Hedge funds have much less regulation since they are part of private partnerships and free from most SEC regulation. They permit investors to take on many risks unavailable to mutual funds. Hedge funds, however, may require higher fees and provide less transparency to investors. This offers significant counter party risk and hedge fund investors need to be more careful about the firm they invest with
What are the benefits to small investors of Investing via mutual funds? What are the disadvantages?
Mutual funds offer many benefits. Some of those benefits include: the ability to invest with small amounts of money, diversification, professional management, low transaction costs, tax benefits, and the ability to reduce administrative functions. The disadvantages associated with investing in mutual funds are generally operating expenses, marketing, distribution charges, and loads. Loads are fees paid when investors purchase or sell the shares.
City Street Fund has a portfolio of $450 million and liabilities of $10 million. a. If there are 44 million shares of outstanding, what is the net asset value? b. If a large investor redeems 1 million shares, what happens to the portfolio value, to shares outstanding, and to NAV?
a) NAV = (450m-10m)/44m = $10.b) Because 1m shares are redeemed at NAV=$10, the value of the portfolio decreases to:Portfolio value = 450m - ($10*1m) = $440m(440m-10m)/(43m) = $10
Open-end equity mutual funds find it necessary to keep a small fraction of total investments, typically around 5% of the portfolio, in very liquid money market assets. Closed-end funds do not have to maintain such a position in "cash-equivalent" securities. What differences between open-end and closed-end funds might account for their differing policies?
open-end funds are more popular in comparison to close end funds because they allow investors to pool their money and invest to achieve their objectives; close-end funds do not receive deposits form investors and sell their funds at a discount on the NAV, there is no redemption and can sell the shares when they want
What are some comparative advantages of investing your assets in the following: a. Unit investment trust b. Open-end mutual funds c. Individual stocks and bonds that you choose for yourself
unit investment trusts: they have less or no management so there are lower fees, which may increase return; also easily liquidated and stable (less risky) b. open-end mutual funds are bought and sold at NAV, they are easily liquidated and there is no trading commission, considered more elastic than close-end and permit diversification with less risk c. individual stocks/bonds: expenditures limited to the amount you purchase and decisions are up to the investor
