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.
Table of Content
Foreword Robert J. Shiller xi
Preface to the Second Edition xiii
Acknowledgments xvii
Section One An Investor’s Guide to Mutual Funds
Chapter 1 Investing through Mutual Funds 3
Advantages and Disadvantages of Mutual Funds 4
History and Growth 8
Regulators and Industry Associations 16
Chapter Summary 22
Notes 23
Chapter 2 How Mutual Funds Work 27
Buying and Selling Fund Shares 28
The Pass-Through Tax Status of Mutual Funds 31
A Virtual Corporation 34
Ethical Standards 41
Alternatives to Mutual Funds 46
Chapter Summary 52
Notes 53
Chapter 3 Researching Funds: The User Guides 57
Mutual Funds and Disclosure 57
The Summary Prospectus 62
Beyond the Summary Prospectus 69
Using the User Guides 75
Chapter Summary 76
Notes 77
Chapter 4 Comparing Mutual Funds 79
Delineating Your Own Investment Objectives 80
Evaluating Performance 83
The Taxonomy of Mutual Funds 88
Chapter Summary 101
Notes 102
Chapter 5 The Cost of Fund Ownership 105
The Focus on Fund Expenses 105
Distribution Expenses 109
Operating Expenses 117
The Management Fee 119
The Active versus Passive Debate 128
Chapter Summary 133
Notes 134
Section Two Mutual Fund Portfolio Management
Chapter 6 Portfolio Management of Stock Funds 139
Stock Research 140
Putting It All Together: Managing a Stock Fund 151
Chapter Summary 164
Notes 165
Chapter 7 Portfolio Management of Bond Funds 169
Bond Fund Holdings 169
Putting It All Together: Managing a Bond Fund 181
Chapter Summary 187
Notes 188
Appendix to Chapter 7 Funds and Derivatives 191
Uses of Derivatives in Funds 192
Regulation of Derivatives in Funds 194
Notes 197
Chapter 8 Portfolio Management of Money Market Funds 199
Money Market Funds and the Financial System 200
Rule 2a-7 202
Money Market Fund Holdings 210
Putting It All Together: Managing a Money Market Fund 214
Chapter Summary 217
Notes 218
Chapter 9 Implementing Portfolio Decisions: Trading 223
The Importance of Trading 224
The U.S. Stock Markets 225
The Role of the Mutual Fund Trader 236
Trading in Bond Funds 243
Chapter Summary 245
Notes 246
Chapter 10 Mutual Funds as Stockholders 249
Mutual Funds and the Proxy Voting Process 249
Proxy Voting by Mutual Funds 253
Activism and Mutual Funds 258
Current Issues in Proxy Voting 264
Proxy Voting Outside the United States 266
Chapter Summary 268
Notes 269
Section Three Sales and Operations
Chapter 11 Retail Distribution 275
What Sells Mutual Funds? 276
Distribution Channels 277
Fund Platforms 284
Distribution Strategy 290
Chapter Summary 295
Notes 296
Chapter 12 Retirement Saving through 401(k) Plans 301
The Benefits of Tax-Deferred Saving 302
History and Growth of 401(k) Plans 304
Contributions to 401(k) Plans 310
Investment Options in 401(k) Plans 312
Target Date Funds 316
Plan Administration 319
Chapter Summary 320
Notes 321
Chapter 13 Other Retirement Planning Options 325
Individual Retirement Accounts 326
Variable Annuities 332
The Future of Retirement Income in the United States 334
Chapter Summary 339
Notes 339
Chapter 14 Fund Operations 343
The Transfer Agent 343
Fund Accounting 355
Investment Operations 366
Chapter Summary 370
Notes 372
Section Four Beyond Traditional Funds
Chapter 15 Exchange-Traded Funds 377
A Brief History 377
Advantages and Disadvantages 380
Legal Structure 381
Operations 384
Portfolio Holdings 387
The Future of ETFs 393
Chapter Summary 394
Notes 395
Chapter 16 Hedge Funds 399
Traditional Hedge Funds 400
Traditional Hedge Fund Investors 415
The New Hedge Funds: Liquid Alternatives 419
Chapter Summary 423
Notes 424
Section Five The Internationalization of Mutual Funds
Chapter 17 Cross-Border Investing 433
The Growth in Cross-Border Investing 433
Advantages and Risks of Investing Overseas 437
Operational Challenges of Investing Overseas 440
Putting It All Together: Managing a Global or International Fund 444
Chapter Summary 448
Notes 449
Chapter 18 Cross-Border Asset Gathering 451
The Global Market for Investment Funds 451
Models for a Global Fund Business 459
The UCITS Model 464
Chapter Summary 473
Notes 474
Appendix to Chapter 18 Gathering Fund Assets through Retirement Plans 477
Chile’s Retirement System 480
Singapore’s Retirement System 483
Notes 487
About the Companion Website 489
About the Authors 491
Index 493
About the author
ROBERT POZEN is Senior Lecturer at Harvard Business School and a Senior Fellow at the Brookings Institution. During his distinguished career, he has been active in business, government, and academia. From 1997 to 2001, he was President of Fidelity Management & Research Co. From 2004 to 2011, he was executive Chairman of MFS Investment Management, which now manages over $400 billion in assets.
THERESA HAMACHER, CFA, is president of NICSA, a trade association serving the global investment management community. She is the former CIO for Pioneer Investment Management USA in Boston, Massachusetts. Previously, she was the CIO for Prudential Mutual Funds in Newark, New Jersey.
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