UGBA 133 Lecture 9 Mutual Funds[1]

UGBA 133 Lecture 9 Mutual Funds[1] - BA 133 MUTUAL FUNDS...

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BA 133: MUTUAL FUNDS, WEEK 7 Chapters 1.4, 4, and 24.7; Homework: 4-2, 4, 5, 6, 10, 12, 16, 18. LECTURE OBJECTIVES: MUTUAL FUND OBJECTIVES—FACTS VERSUS REALITY WHY FUNDS DON’T DELIVER; 7 REASONS AND THEIR CON- SEQUENCES TYPES OF FUNDS & CHARACTERISTICS: CLOSED END vs. OPEN END. CALCULATE NET ASSET VALUES BUT FIRST A COMMENT ABOUT--- FINANCIAL INTERMEDIATION/DISINTERMEDIATION: In Chapter 1.4, your text discusses briefly the concept of financial intermediation in the context of mutual funds. This is a very important concept which merits some comments. Mutual funds created a way by which people with modest wealth could obtain a well diversified portfolio. There is no question that funds greatly assisted the growth in such retirement programs as IRAs and 401-Ks. But they performed another significant development as well years earlier: In the 1960s you could buy Treasury Bills directly from the Federal Reserve in multiples of $1,000. Because banks and S/Ls had interest rate ceilings placed upon them by the Federal Government, when inflation began and interest rates rose, people withdrew their deposits from banks and S/Ls and began buying T-Bills. Because there was no such thing as a money market mutual fund then, I was forced to teach my clients how to subscribe to the Federal Reserve to buy T-bills. Rather than fight inflation, the Lyndon Johnson administration directed the minim- um bid for T-bills to be raised to $10,000, although you could continue to buy notes and bonds for $1,000. Later, when interest rates fell, the minimum was lowered to return to $1,000. Ultimately, during the Carter administration, interest rates rose and the $10K minimum bid was reinstated, but only for T-bills. That single act created the money market mutual fund industry. The $10K minim- um bid for T-bills created a financial disintermediation , and the money market fund created a financial intermediation , ultimately creating havoc in the banks. 1
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Chapter 4: Overview: Mutual funds are a tremendous concept which have generally failed to live up to their major objective : superior investment performance for small investors, as a low cost provider. The text nicely describes what mutual funds are supposed to do: 1. Provide diversification 2. Provide professional investment management of that portfolio 3. Maintain accurate records of your transactions and tax consequences 4. Because of the size of the pooled funds, the fund shareholders should be able to obtain lower transactions costs via negotiated rates . The results? You get diversification, but most of the stock mutual funds are actu- ally “closet indexers” but regardless, instead charge higher management fees than you would pay for an index fund. You almost never get professional investment management if you mean “can they outperform standard investment benchmarks?” Yes, only about one in five funds can outperform the SP500, but that one in five is rarely the same fund year after year.
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