Lecture Presentation to accompany Investment Analysis & Portfolio ...


Nov 18, 2013 (3 years and 29 days ago)


Lecture Presentation Software

to accompany

Investment Analysis and

Portfolio Management

Seventh Edition


Frank K. Reilly & Keith C. Brown

Chapter 25

Chapter 25

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?

Chapter 25

Professional Asset Management

Who manages the investment company
portfolio and how are its managers

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

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

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

Chapter 25

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?

Chapter 25

Professional Asset Management

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

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

The Asset Management Industry:
Structure and Evolution

Contract directly with a management and
advisory firm

relationship with client

assets under management (AUM)

separate accounts


Commingling of investment capital of
several clients in an investment company

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

End Versus Open
Investment Companies

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

end fund index

end investment companies

Mutual funds

Sell and repurchase shares at NAV

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

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

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

Mutual Fund Costs

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

Types of Investment Companies
Based on Portfolio Objectives

Common stock funds

Balanced funds

Taxable bond funds

Municipal bond funds

Money market funds

Global Investment Companies

Foreign funds

International funds

Global funds

Fund categories



Sources of Information

About Mutual Funds

The Wall Street Journal


weekly and quarterly

Investment Companies

Mutual Funds Update

Mutual Funds Report

end Weekly Review


Management Results


Business Week

“Mutual Fund Scoreboard”

Morningstar Mutual Funds

Value Line

Ethics and Regulation in the Professional
Asset Management Industry


looking out for the interest of another

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

The asset management industry is heavily regulated
to ensure a minimum level of acceptable practice

Investment Company Act of 1940

Securities Act of 1933

Securities Act of 1934

Investment Advisors Act of 1940

ERISA (1974)

Prudent man


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 Analysts (CFAs) are
expected to uphold the ethical standards of

Compensation dilemma

incentives and risk

Soft dollars

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

Results are more consistent in shorter time

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

The Internet

Investments Online










End of Chapter 25

Professional Asset

Future topics

Chapter 26

Evaluation of Portfolio Performance