Please enable JavaScript.
Coggle requires JavaScript to display documents.
Mutual funds and fund management (MF (types (long term (equity funds…
Mutual funds and fund management
MF
types
unit trusts vs mutual funds
The main difference between the two is in their legal structure. A mutual fund is an investment company that issues redeemable shares while a unit trust, because it is not a company, only issue units.
short term
taxable MMMF
money market mutual funds are registered under the Investment Company Act of 194 and regulated under rule 2a-7 of the Act
MMMF pay dividends that reflect prevailing short term interest rates are redeemable on demand, and seek to maintain a stable NAV
MMF vs MMDA
Money market deposit account is a bank deposit, it's guaranteed and FDIC insured, you'll receive a Truth in Savings form when you deposit
tax exempt MMMF
long term
Bond funds
equity funds
index funds
seek to replicte the performance of a given benchmark
offers benefits of a traditional mutual funds without the fees of the professional money manager
growth in the share of index fund in fund market percentage, but index fund share of US stock market is still small
hybrid funds
specialised funds
Exchange traded funds
investment funds designed to track a particular index (generally stock index or FTSE)
It aims to acieve the same return as the particular market index, they can either be open ended or UITs, but are NOT PERMITTED TO BE CALLED MUTUAL FUNDS
Investors buy shares in the ETF
open ended
fund grows and shrinks with purchase/sale
ETF shares are traded on the stock exchange
shares are bought through brokers investors pay commisions on the trades
No premium or discount
an annual management chage is deducted from the fund
shares reflect the value of the investment in the fund
small spread
No stamp duty on purchases
Key issues
in days of volatile trading, the share price of an ETF can diverge from the proe of assets it's tracking
investors in volatile markets may get significantly less than the assets worth
possible to buy options on ETFs or go short ETFs
problems with synthetic ETFs where investors take risk on the ETF provider
because ETFs are traded like stocks, the prices reflect S&D, not just the underlying value of the assets
fee structure
from
institutional investor insurance company pension fund Asset manager
Individual
Government
to
Government Bond
Certificate of Deposit/ Team Deposit
to banks
CP/ ABCP
to corp bank broker/dealers
Floating Rate note
government corp
Repo
Custodian bank
both to broker/dealer or to HF
structure and organisation
structure
closed end fund
a fixed number of nonredeemable shares are sold through an initial offering and are then traded in the OTC market, prices are determined by D&S forces
open end fund
investors may buy or redee, shares at any point, where the price is determined by NAV of the fund
organization
regulation
MMF regulations as of 2010
MMF are regulated by the SEC, both as MF and pursuant to rule 2a-7 under Investment Company Act of 1940
rule 2a-7 includes several conditions that limit risk in MMF's portfoilo by governing credit quality, liquidity, diversification, and maturity of MMF investments
The SEC approved amendments to rule 2a-7 to tighten fund liquidity requirements, impose stricter quality requirements, address reliance on rating agencies, impose stricter maturity limits, require enhanced disclosure of portfolio holdings and address issues that arise when a money market fund experiences market challenges
Funds that meet the risk limiting provisions are allowed to value securities at an amortised cost instead of market value. This allows the fund to value shares at the fixed price under a wider range of market conditions
MMMF regulations
credit quality
at least 97% of a MMF's assets must be invested in securities that receive the highest short term rating or securitites of comparable quality (first tier securities
liquidity
All taxable funds must maintain 10% of assets in daily liquid assets (cash) US treasuries or mature securities are subject to a demand feature within one business day. All funds must also have 30% assets in weekly liquid assets. Those securities with remaining 60 days or less or those that are mature are subject to a demand feature within 5 business days
diversification
MMF may not invest more than 5% in the securities of a single issuer (0.5% if ratings are in the second highest short term rating cat)
maturity
MMF cannot acquire a portfolio security with a remaining maturity of greater than 397 days. They are also required to maintain a dollar weighted average maturity of 60 or less day without consideration of interest rate reset dates on variable or floating rate securities
2014 amendments (eff '16)
require a floating NAV for institutional prime MMF, which allows the daily share prices of these funds to fluctuate along with changes based on market value of fund assets. Tehy will no longer be allowecd to use special pricing and valuation conventions that used to permit them to maintain a constant price of $1
liquidity fees and redemption gates are provided to non govt MMF to address runs
growth of MF
huge growth in US, large percentage of market securities are MF
distinguishing features of MF
"redeemable", investors can sell shares back to the fund
MF generally create and sell new shares to accommodate new investors, on a continuous basis, although in some cases funds stop selling when they become too large
the price = NAV + shareholder fees at teh time of purchase
investors directly purchases MF shares from the fund itself instead of from secondary market
managed by investment advisors that are registered witht eh SEC
Mutual fund prospectuses and objectives
Prospectus
SEC require MF managers to specify the investment objectives in a prospectus, a statutory prospectus describes the fund's investment goals and objectives, fees and expenses, investment strategies and risks, and informs investeors how to buy and sell shares
they may also elect to provide investors with a short summary prospectus that contains key info instead of the full prospectus, however, the additional info and full stat prospectus must be available on internet and paper upon request
Performance of MF
The definition is different for a fund manager and investors
for fund manager, risk is defined as the deviation from the index
for investor risk is losing money
Problem arises from diverging interest
no incentive for manager to deviate from the heard, risk of losing job vs chances of winning
performance is measured against an index not in abs terms
Costs
When you buy shares you pay the current NAV plus any fee the fund assesses at the time of purchase
when you sell the shares, the fund will pay you the NAV minus any fee the fund assess at the time of redemption, such as deferreed sales load or redemption fee
investors incur fees and expenses such as upfront or back end fees and fund operating expenses
NAV
The current market value of all the fund's assets, minus liabilities, divided by the total number of outstanding shares
Other fees charged by Mutual funds
contingent deferred sales charge
a back end fee that may appear altogether after a specific period
redemption fee
back end loas
exchange fee
a low fee for transferring moeny between funds in the same family
account maintenance fee
charges of account balance is too low
12b-1 fee
fee to pay marketing, advertising and commissions
TER
the established metric, total expense ratio include charges such as the annual management fee, admin and legal fees and distribution fees. It does not include dealing costs, entry or exot fees and performance fees
tends to fall as fund assets rise
Returns from MF
Capital gains distributions
when fund sells security that has gained in price, the capital gains are distributed to investors
Increased NAV
if the market value of the portfolio increases after deduction of expenses and liabilities, then the value (NAV) of the fund and its shares increases, the higher NAV reflecta a s higher investment value
Dividend payments
earn income in form of dividends and interest, fund then pays shareholders nearly all of the income earned in form of divideneds
With respect to dividend payments and cap gains distributions, funds will usually give you a choice to receive a check or other form of payment, or to have your dividends or distributions reinvested in the fund to buy more shares (often without additional sales load)
MF and asset management in Asia and HK
current issues
regulators worry about the impact of MMF in the fin sys particularly whether the funds present a systemic risk
European funding capacity was severely impacted when funds pulled out of the market due to the crisis
With investors pulling out, the funds have suffereed from low interest
NIRP is affecting the business model
Role of MMF in the commercial paper market has been reduced
In HK
Growth of ETFs
ETF vs ETPs, the issue of counterparty risk
collateral requirements
Performance and returns
active vs passiv edebate
the great rebalancing?
regulators focus on shadow banking possible sstemic role
the floating vs stable NAV debate
capital reserve managment
growth of digital and robo advice in asset management
HK
increase in combined fund management business in HK, largely in public and private funds. Equities take up a majority of assets managed in HK, followed by Bonds and cash and money markets and finally collective investments
Collective investment schemes in HK
regulation: Protection of investors ordinance, Regulator: The
SFC
only entities resgisted with SFC are enabled to issue MF and unit trusts
SFC reviews and authorises offering documents of retail investment products, pursuant to the SFO or the Companies' Ordinance
info include prospectus, audited annual report, unaudited semi annual report, and other info, after investments, regular statements have to be provided including valuations as well as number of units
The SFC DOES NOT APPROVE OF RETAIL INVESTMENT PRODUCTS, it reviews and
authorises offering documents
assessment of whether a recommendation is suitable must be done by a selling intermediary at the point of sale, considering the investor's personal circumstances
ASIA
rise in china's asset management industry
rise of MMF in China
net sales of MMF in Asia are largely related to Chinese money market instrument returns
still a lower share than US investors though
overview
market
increasing trend of number of open eneded funds
increasing IB employment
Vanguard
started the first index mutual find for individual investors and is currently no 2 in asset management behind BlackRock
pros and cons of collective investment schemes
benefits
diversification
investors immediately realise benefits of diversisifcations
cost advantages
mutual fund can negotiate lower transaction fees than would be availbale
denomination intermediation
investors can participate in equity and debt offerings that individually require more capital than they posses
managerial expertise
prefer to rely on professional money managers to select investments
liquidity intermediation
investors can quickly convert investments into cash while still allowing fund to invest for Long term
disadvantages
lack of control
investors cannot ascetain the exact makeup of fund's portfolio at any given time, neither can they directly influence which securities the fund manager buys and sells or the timing of those trades
price uncertainty
price at which you purchase or redeem shares in a MF is dependant on the fund's NAV, which the fund might not calculate until many hours after you placed your order,
costs despite negative returns
fees and expenses are due despite fund performance
Shareholders
Mutual fund BOD
custodian
transfer agent
administrator
principal underwriter
investment advisor
independent public