Chapter 7: Pooled Investments

Expense Ratio Formula

(Annual Operating Expenses)/(Avg dollar value of the funds Assets)

NAV per Share Formula

(NAV)/(# of Outstanding Shares)

REITs

- Dividends are taxed as ordinary income and capital gains are taxed a LT capital gains - Can avoid being taxed as a corporation by receiving 75% or more of its income from real estate and distributing 90% of its taxable income to its shareholders - Are liquid - Do Not offer pass through of losses - Not redeemable

Difference between REITs and Unlisted REITs

- Liquidity - Suitability - Regulatory oversight

What will have an effect on NAV of a mutual fund

- Market appreciation of portfolio securities. - Market decline in the value of portfolio securities.

Money Market Fund

- No Sales charge - Must receive a Prospectus

Management Investment Companies

1) Closed-End Investment Companies 2) Open-End Investment Companies

Mutual Funds use 3 different methods to collect fees for the sale of shares

1) Front-End Load(A Shares): added to NAV at the time shares are bought - Lowest Expense ratio 2) Back-End Load(B Shares)(Contingent Deferred Sales Charge): charged at the time investors redeem mutual fund shares. - Sales load is a declining percentage charge that is reduced annually, after 7-8 years drops to 0 and converts to class A shares 3) 12b-1 Asset-Based Fees(C Shares)(Level Load): Provision permits a mutual fund to collect a fee for promotion of sales-related activities - No sales charge to purchase, generally 1% CDSC for 1 year with a continuous 12b-1 charge - Fee cannot exceed .75% of net assets - Not considered level load if exceeds .25%

Unit Investment Trusts (UITs)

An investment company with a low expense ratio and a portfolio that doesn't change - Unmanaged investment company organized under a trust indenture - Do not have Board of Directors, employ investment advisors, or actively manage their own portfolio - Sells redeemable securities and each share is an undivided interest in the underlying portfolio

Structured Products

Built to meet specific needs - The goal is to give investors more reason to accept a lower interest rate on debt in exchange for certain feature

Open-End Investment Companies (Mutual Funds)

Can raise an unlimited amount of investment capital by continuously issuing new shares - Investors buy shares at the POP - Only issue common stock - Sells redeemable securities - When an investor sells shares, the company redeems them at NAV - Voting rights - Investors own an undivided interest in the entire portfolio - Compute NAV daily - Forward Pricing: price is based on the next computed NAV - Net Redemptions - Sales charge: cannot exceed 8.5% of POP - Taxed at a LT Capital gains (15%)

The primary difference between an open-end and a closed-end investment company is?

Capitalization

The Investment Act of 1940

Classifies investment companies into three broad types: 1) Face-Amount Certificates 2) Unit Investment Trusts (UITs) 3) Management Investment Companies

Net Redemptions

During declining markets, there is an excess of shareholders redemption over new shares purchased. - When that occurs, the portfolio manager must decide which assets to liquidate when prices are falling - A fund suffering from net redemption is probably not going to deliver the performance clients are seeking

If general interest rates increase, the interest income of an open-end bond fund whose sales exceed redemptions will likely

Increase

Letter of Intent (LOI)

Investor informs the investment company that he intends to invest the additional funds necessary to reach the breakpoint within 13 months - Decreases overall sales charge by signing LOI - Holds shares in escrow until investor complete the intended investment - Appreciation and reinvesting dividends do not count toward the LOI - Backdating the Letter: can sign LOI as late as 90 days after the initial purchase, include prior purchase

POP Formula

NAV per Share + Sales Charge

Closed-End Investment Companies (publicly traded funds)

Offers a fixed number of shares and does not continually offer new shares in response to investor demand. - Raise capital by conducting common stock offerings - Supply and demand determines Bid Price (investor sells) and Ask Price (Investor buys) - Issue bonds and preferred stock - Trade on an Exchange of OTC (Secondary market) - Trade at a premium or discount to the shares NAV - Sells only full shares - Voting rights - Commission

ETNs

Registered under the Securities Act of 1933, also known as Equity linked notes (ELNs) - Are a type of exchange-traded debt security offering a return linked to a market index or other benchmark - Only should be offered to people who are knowledgeable and comfortable with the risk - Credit risk, market risk, liquidity risk, call risk, early redemptions risk, and acceleration risk - Issued by financial institutions like banks

ETFs

Registered with the SEC under the Investment Company Act of 1940 as a UIT or Mutual Find - Invest in a specific index - Passive investing - Purchase on Margin or sold short - Lower expenses than mutual funds

To qualify for the maximum 8.5% Sales Charge

The Investment company must offer: 1) Breakpoints 2) Rights of Accumulation