The Fund Industry: How Your Money is Managed

Preface xiii

Acknowledgments xvii

SECTION ONE An Investor's Guide to Mutual Funds 1

CHAPTER 1 Investing through Mutual Funds 3

Advantages and Disadvantages of Mutual Funds 5

History and Growth 9

Regulators and Industry Associations 18

Chapter Summary 23

CHAPTER 2 How Mutual Funds Work 25

Buying and Selling Fund Shares 26

The Pass-Through Tax Status of Mutual Funds 29

A Virtual Corporation 31

Ethical Standards 39

Alternatives to Mutual Funds 43

Chapter Summary 49

CHAPTER 3 Researching Funds: The User Guides 51

Mutual Funds and Disclosure 51

The Summary Prospectus 56

Beyond the Summary Prospectus 63

Using the User Guides 69

Chapter Summary 71

CHAPTER 4 Comparing Mutual Funds 73

Delineating Your Own Investment Objectives 74

Evaluating Performance 77

The Taxonomy of Mutual Funds 83

Chapter Summary 99

SECTION TWO Mutual Fund Portfolio Management 101

CHAPTER 5 Portfolio Management of Stock Funds 103

Stock Research 104

Putting It All Together: Managing a Stock Fund 117

Chapter Summary 130

CHAPTER 6 Portfolio Management of Bond Funds 133

Bond Fund Holdings 133

Putting It All Together: Managing a Bond Fund 145

Chapter Summary 153

APPENDIX TO CHAPTER 6 Bond Basics 155

Defining Characteristics of Bonds 156

Key Analytical Measures 160

Risks of Bond Investments 164

CHAPTER 7 Portfolio Management of Money Market Funds 169

How—Exactly—the $1.00 NAV Works 170

Money Market Fund Holdings 175

Putting It All Together: Managing a Money Market Fund 181

Money Market Funds and the Financial System 184

Chapter Summary 187

CHAPTER 8 Implementing Portfolio Decisions: Buying and Selling Investments 189

The Importance of Trading 190

The Evolution of the U.S. Stock Markets 191

The Role of the Mutual Fund Trader 201

Trading in Bond Funds 210

Chapter Summary 212

CHAPTER 9 Mutual Funds as Institutional Investors 215

Mutual Funds as Stockholders and the Proxy Voting Process 216

Proxy Voting by Mutual Funds 220

Activism and Mutual Funds 224

Mutual Funds and Social Change 232

Proxy Voting Outside the United States 234

Chapter Summary 236

SECTION THREE Selling Investment Funds 239

CHAPTER 10 Retail Sales 241

What Sells Mutual Funds? 241

The Intermediary Channel 243

The Direct Channel: No-Load Firms and Fund Supermarkets 260

Cross-Channel Trends 264

Chapter Summary 271

CHAPTER 11 Retirement Plans and Mutual Funds 273

The Tax Benefits of Qualified Retirement Plans 274

401(k) Plans 278

Individual Retirement Accounts 293

The Future of Retirement Planning in the United States 298

Chapter Summary 302

CHAPTER 12 The Competition from Exchange-Traded Funds and Hedge Funds 305

Exchange-Traded Funds 305

Hedge Funds 319

Chapter Summary 333

SECTION FOUR Operations and Finance 335

CHAPTER 13 Customer Service 337

The Role of the Transfer Agent 337

Technology and Shareholder Servicing 349

Transfer Agents as an Industry 354

Chapter Summary 361

CHAPTER 14 Portfolio Recordkeeping and Valuation 363

A Day in the Life of the Fund Accountant 364

Valuation of Portfolio Holdings 370

Keeping Track of Portfolio Securities: The Custodian 376

A Critical Link: Investment Operations 379

Behind the Scenes: The Independent Auditor 384

Chapter Summary 388

CHAPTER 15 The Financial Dynamics of the Fund Management Industry 391

Expenses for Fund Investors 392

Management Fee Revenue: The Debate 398

Mergers and Acquisitions Involving Fund Sponsors 408

Chapter Summary 416

SECTION FIVE The Internationalization of Mutual Funds 419

CHAPTER 16 Cross-Border Investing 421

The Growth in Cross-Border Investing 421

Advantages and Risks of Investing Overseas 426

Operational Challenges of Investing Overseas 431

Putting It All Together: Managing a Global or

International Fund 435

Chapter Summary 442

CHAPTER 17 Cross-Border Asset Gathering 443

The Global Market for Investment Funds 444

Models for a Global Fund Business 450

The UCITS Model 456

European Pension Pooling 463

Chapter Summary 469

CHAPTER 18 The Market for Investment Funds: Beyond the United States and Europe 471

Asia 472

The Americas ex U.S. 487

Chapter Summary 495

Notes 497

About the Authors 515

Index 517