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Lecture Presentation Software


to accompany

Investment Analysis and

Portfolio Management

Sixth Edition

by

Frank K. Reilly & Keith C. Brown

Chapter 26

Copyright © 2000 by Harcourt, Inc. All rights reserved.

Chapter 26

Professional Asset Management

Questions to be answered:


What are the different ways that professional
asset management firms can be organized?


How has the structure of the asset
management industry changed over time?


How are managers at investment advisory
firms compensated?

Copyright © 2000 by Harcourt, Inc. All rights reserved.

Chapter 26

Professional Asset Management


Who manages the investment company
portfolio and how are its managers
compensated?


How do you compute the net asset value
(NAV) for an investment company?


What is the difference between closed
-
end and
open
-
end investment companies?


What is the difference between the NAV and
market price for a closed
-
end fund?

Copyright © 2000 by Harcourt, Inc. All rights reserved.

Chapter 26

Professional Asset Management


What are load fees, 12b
-
1 fees, and
management fees and how do they influence
investment company performance?


What are the two major means of fund
distribution and what has been the trend for
each approach?


Given the breakdown of all funds by
investment objectives, which groups have
experienced relative growth or decline?

Copyright © 2000 by Harcourt, Inc. All rights reserved.

Chapter 26

Professional Asset Management


Given a desire to have a personal portfolio
manager perform certain functions for you,
how do investment companies help fulfill this
need?


What are the ethical dilemmas involved in the
professional asset management industry?


What has been the risk
-
adjusted performance
of mutual funds relative to alternative market
indexes?

Copyright © 2000 by Harcourt, Inc. All rights reserved.

The Asset Management Industry:
Structure and Evolution

1. Contract directly with a management and
advisory firm

relationship with client

assets under management (AUM)

separate accounts

customized

2. Commingling of investment capital of
several clients in an investment company

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What is an Investment Company?


An investment company invests a pool of funds
belonging to many individuals in a portfolio of
individual investments such as stocks and bonds


The total market value of all investments divided
by the number of fund shares outstanding is the
net asset value (NAV)


Portfolio management is handled by an
investment management company

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Closed
-
End Versus Open
-
End
Investment Companies


Closed
-
end investment company


Stock trades on secondary market


Net asset value (NAV) is determined twice daily, but
market price determined by supply and demand


Discounts from NAV can be opportunities


Closed
-
end fund index


Open
-
end investment companies


Mutual funds


Sell and repurchase shares at NAV

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Mutual Fund Costs


Load versus no
-
load open
-
end funds


Load funds charge sales commission up to 8.5% of
NAV, but usually not a redemption fee


No
-
load imposes no initial sales charge, so it sells
shares at NAV, but may charge a small redemption
fee of 1/2%


Low
-
load imposes a front
-
end sales charge in the
3% range

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Other Expenses: 12b
-
1 Fees,

Rear
-
End Loads, Management


Contingent deferred sales loads, or redemption
charges, or “rear
-
end loads”, decline over time


Annual 12b
-
1 fee


Details about funds charges are found in the
fund’s prospectus


Fund management fees


Portfolio turnover


Expense ratios

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Types of Investment Companies
Based on Portfolio Objectives


Common stock funds


Balanced funds


Taxable bond funds


Municipal bond funds


Money market funds

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Global Investment Companies


Foreign funds


International funds


Global funds


Fund categories, regions, countries

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Sources of Information

About Mutual Funds


The Wall Street Journal


Barron’s
-

weekly and quarterly


Investment Companies


Mutual Funds Update


Mutual Funds Report


Closed
-
end Weekly Review


FundEdge


Management Results


Forbes


Business Week
-

“Mutual Fund Scoreboard”


Morningstar Mutual Funds


Value Line

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Ethics and Regulation in the Professional
Asset Management Industry


Agency
-

looking out for the interest of
another


Asset management industry is based on
handling someone else’s money


Investment Company Act of 1940


Securities Act of 1933


Securities Act of 1934


Investment Advisors Act of 1940


ERISA (1974)
-

Prudent man rule

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Ethics and Regulation in the Professional
Asset Management Industry


Association for Investment Management and
Research (AIMR) has a Code of Ethics and
Standards of Professional Conduct


Chartered Financial Analyst (CFA)


Compensation dilemma
-

incentives and risk


Soft dollars

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Performance of Investment Companies


Below average returns for actively managed
equity and bond funds


Do a fund’s objectives matter?


Positive relationship between stated objectives
and risk measures


Do managers generally outperform the
market?


Results are more consistent in shorter time
periods

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Your Portfolio Manager

1. Determine your risk
-
return preferences and develop a
portfolio that is consistent with them

2. Diversify your portfolio to eliminate unsystematic risk

3. Maintain your portfolio diversification and your desired risk
class while allowing flexibility so you could shift between
alternative investment instruments as desired

4. Attempt to achieve a risk
-
adjusted performance that is
superior to aggregate market performance

5. Administer the account, keep records of costs, provide
timely information for tax purposes, and reinvest dividends
if desired

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The Internet

Investments Online

www.nelnet.com

www.investools.com

www.investools.com/cgi
-
bin/server.ol/Newsletters/CEFD

www.fundsinteractive.com/index.shtml

www.wiesenberger.com


www.mfea.com

www.investorguide.com/MutualFunds.htm

www.stocksmart.com/tr/tmf.html

www.mfcafe.com


www.morningstart.net


www.mfmag.com

www.ici.org



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End of Chapter 26


Professional Asset
Management

Copyright © 2000 by Harcourt, Inc. All rights reserved.

Future topics

Chapter 27



Composite Portfolio Performance
Measures


Performance Attribution Analysis


Evaluation of Bond Portfolio
Performance

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