The Fund Industry

How Your Money is Managed

Robert Pozen, Theresa Hamacher

• Publisher: Wiley
• Year: 2015
• Print ISBN: 9781118929940
• eBook ISBN: 9781118929957
• Edition: 2
• Topic: Business
• Subtopic: Investments & Securities
• Index: Business

A guide to how your money is managed, with foreword by Nobel laureate Robert Shiller

The Fund Industry offers a comprehensive look at mutual funds and the investment management industry, for fund investors, those working in the fund industry, service providers to the industry and students of financial institutions or capital markets. Industry experts Robert Pozen and Theresa Hamacher take readers on a tour of the business of asset management. Readers will learn how to research a fund and assess whether it's right for them; then they'll go behind the scenes to see how funds are invested, sold and regulated. This updated edition expands coverage of the segments of the industry where growth is hottest, including hedge funds, liquid alternatives, ETFs and target date funds—and adds an introduction to derivatives.

Mutual funds are a key component of financial planning for 96 million Americans. Nearly a quarter of U.S. household savings are invested in funds, which give individual investors affordable access to professional management. This book provides a detailed look at how firms in the industry:

• Invest those savings in stocks and bonds
• Evaluate the risks and returns of funds
• Distribute funds directly to consumers or through financial advisors or retirement plans
• Handle the complex operational and regulatory requirements of mutual funds
• Vote proxies at the annual meetings of public companies
• Expand their operations across borders

Along the way, the authors describe the latest trends and discuss the biggest controversies—all in straightforward and engaging prose. The Fund Industry is the essential guide to navigating the mutual fund industry.

Section One
An Investor's Guide to Mutual Funds

Mutual funds are designed to make life easier for investors. Funds give savers of even modest means a convenient access to top-quality investment management at a reasonable price.

Since the mission of funds is to serve investors, we start this book by taking a look at mutual funds from an investor's perspective. We give an overview of mutual funds by focusing on five critical questions:

1. Why invest through mutual funds?
2. How do mutual funds work?
3. How do investors research a potential mutual fund purchase?
4. How do investors choose a mutual fund that's right for them?
5. What does it cost to own a mutual fund?

This section has five chapters:

1. Chapter 1 provides an introduction to investing through mutual funds. It reviews their advantages and disadvantages, summarizes their history, and discusses how they are used by investors today. It concludes by providing an overview of the entities that work to ensure that funds meet their obligations to investors: the government regulators and the industry associations.
2. Chapter 2 describes the basic structure and operations of a mutual fund. It begins with a discussion of two key fund features: daily liquidity at net asset value and pass-through tax status. It explains how funds operate through contracts with service providers supervised by a board of directors, and it discusses the ethical standards that apply to fund managers. Finally, it compares mutual funds to alternative methods of investing, either directly in securities or through other commingled investment vehicles.
3. Chapter 3 explains how investors can learn about potential mutual fund investments through information provided by the funds themselves. It begins with a review of the principle of disclosure. It then focuses on the summary prospectus of a mutual fund and continues with an overview of the other parts of the prospectus and of the shareholder reports. It ends with a discussion of how investors can use this information to select mutual funds.
4. Chapter 4 discusses how investors might go about choosing a mutual fund. It places funds in the context of a personal financial plan and then explains the various approaches to evaluating fund performance results. It next reviews each type of mutual fund and ends with a discussion of the factors investors should consider when choosing funds in that category.
5. Chapter 5 discusses the importance of mutual fund fees and explains the charges that investors pay when they own a fund. It also reviews the controversy regarding those fees, especially the level of the management fee. Finally, it reviews the arguments in favor of both passive (index) and active investing, a discussion that is very relevant to mutual fund fees because of the differing costs of the two types of investing.

Chapter 1
Investing through Mutual Funds

The odds are high that you already own a mutual fund. You're in good company: at the end of 2013, an estimated 96 million people in the United States had, on average, invested 22 percent of their money through a fund.¹ Notice that we say that you invest through a mutual fund rather than in a fund. That's because a mutual fund isn't really an investment itself; it's just an intermediary—a financial intermediary.

Mutual funds have made it easy for individuals (you, me, and anyone with money to invest) and institutions (corporations, foundations, pension funds) to pool their money to buy stocks, bonds, and other investments. A fund is mutual because all of its returns—from interest, dividends, and capital gains—and all of its expenses are shared by the fund's investors.

Funds offer investors advantages over buying and selling securities directly, including:

• Reduction of risk by investment diversification.
• Ability to sell your investment daily.
• Access to the expertise of professional money managers.
• Ability to participate in investment strategies that might not otherwise be available to smaller investors.
• Administrative convenience and shareholder services.
• A high level of investor safeguards.
• Comprehensive reporting that enables easy comparisons among funds.

These benefits have proven to be very popular with investors around the world; they held a total of $30 trillion in fund assets at the end of 2013. U.S. households now put more of their money into mutual funds than they do directly into stocks, making mutual funds an integral part of financial planning for many people.² We describe a few typical fund buyers in “Mutual Fund Investors.”

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Mutual Fund Investors

Are you—or is someone you know—like one of these typical mutual fund investors?

• A middle-aged couple looking to retire sometime in the next 10 to 15 years. He works for a technology company, while she runs her own consulting business. They're building a retirement nest egg by investing in stock mutual funds through his company's 401(k) plan and her individual retirement account.
• A grandmother who wants to help finance the college tuition of her two infant granddaughters. She opens college savings accounts for both, planning to make annual contributions. She puts the assets in each account into a balanced mutual fund that holds a mix of stocks and bonds.
• A young professional tired of paying rent for his small apartment in the city. He has a goal of moving into his own condo in a few years and has started setting money aside for the down payment through automatic deductions from his paycheck. His savings go into a bond mutual fund recommended by a financial adviser.

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This chapter provides an introduction to investing through mutual funds. It reviews:

• The advantages and disadvantages of investing through mutual funds.
• Their history and their use by investors today.
• The regulators and industry associations that play a key role in the fund industry.

Advantages and Disadvantages of Mutual Funds

Mutual funds have gained such acceptance in household finances because they offer many advantages that include:

• Greater diversification. Through a mutual fund, investors may be able to own more securities than they could if they were acting just for themselves. Plus, investors can diversify even further by buying more than one fund. In 2013, in the United States alone, there were around 10,000 funds to choose from with many different investment profiles—from bond funds to emerging market funds.³ (See “The ABCs of Risk” to understand how diversification helps investors.)
• Daily liquidity. In...

Table of contents

• Cover
• Series Page
• Title Page
• Copyright
• Foreword
• Preface to the Second Edition
• Acknowledgments
• Section One: An Investor's Guide to Mutual Funds
• Section Two: Mutual Fund Portfolio Management
• Section Three: Sales and Operations
• Section Four: Beyond Traditional Funds
• Section Five: The Internationalization of Mutual Funds
• About the Companion Website
• About the Authors
• Index
• End User License Agreement