Trends happen, and those who spot them as they’re just emerging them well and get off at precisely the right time make a great deal of money. As I’ve indicated, this is a very difficult thing to do. Unless you’re a professional observer of the markets with outstanding insights and great powers of observation, you’ll likely come upon the trend too late. The problem: It doesn’t seem too late. You’re bombarded with news stories about the rise of energy stocks or how blue chips are back or how the cell phone industry is about to introduce a new technology that will create huge profits in the industry.
Because of the Internet and multimedia communication devices, these trends are dramatized to the point that we feel we should be taking advantage of them, and that if we’re not, we’re missing the boat. I have documented in a number of chapters how the tech mania that swept the country devastated portfolios of people who didn’t see that the bubble was going to burst. When you’re in the midst of a buying frenzy and every day the media documents how much tech stocks have risen, it’s very difficult to gain perspective and see that the trend has crested and a major correction is imminent. Read the rest of this entry »
BACKGROUND AND PURPOSE
The primary purpose of regulations is to protect investors, and the roots of governmental regulation of mutual funds in the longer-established markets are often associated with major scandals and market crashes.
In the USA, the stock market crash of 1929 prompted an extensive investigation by Congress into the securities industry. It revealed that overselling, or ‘ramming’ of shares, particularly radio company shares, had created unrealistic expectations and false, overvalued markets. The investigation resulted finally in the Investment Company Act 1940, which established the Securities and Exchange Commission (SEC) - this Act remains the cornerstone of US mutual fund regulation - and the Investment Advisers Act 1940. Along with two Acts passed into Federal law in the 1930s - the Securities Act 1933 and the Securities Exchange Act 2934 - these four Acts provide the bulk of federal powers over the activities of US investment companies. In fact, the only addition to US legislation affecting all companies since 1940 is the Sarbanes-Oxley Act of 2002 and that has only an indirect bearing on mutual funds themselves, being more concerned with accounting, auditing and disclosure practices of trading companies, following the Enron and Worldcom scandals. Read the rest of this entry »
Italy - primary regulatory responsibility lies with the central bank - Banca d’Italia - under the Banking Law or, more formally, Legislative Decree 385 0f 1 September 1993, and Law 410 of 23 November 2001 in relation to real estate funds. Essentially, the Bank of Italy authorises banks that provide investment services and other companies that engage in collective asset management. Investment firms are authorised by the separate public authority responsible for regulating Italy’s securities markets, CONSOB - Commission Nazionale per la Societa e la Bores. Read the rest of this entry »
India - the mutual fund industry started in India in 1964 with the formation of the Unit Trust of India, registered under a separate Act of Parliament. Other public sector institutions entered the business in 1987 but it was not until 1993 that the first of the private sector participants commenced operations. Regulatory responsibility resides with the Securities and Exchange Board of India (’SEBI’), which published its Mutual Fund Regulations in 1996 and amended them in January 2006 to widen the permitted investment powers to include gold and goldrelated instruments. Read the rest of this entry »
Hong Kong - the Securities and Futures Ordinance enacted in March 2002 and operational from April 2003, combined into a single ordinance all previously existing ordinances for the regulation of the securities and futures markets, principally the 1974 Protection of Investors Ordinance and the Securities Ordinance. Hong Kong also has a series of Codes, the first of which - the Code on Unit Trusts - was enacted in 1978, when the Committee on Unit Trusts was formed to administer the Code. Read the rest of this entry »
Luxembourg - the authority responsible for supervision and control of the financial sector in Luxembourg is the IMP - Institute Monetary Luxembourgeois - a creation of the 1983 laws to regulate Undertakings for Collective Investment, which first appeared in 1959. The subsequent Law of 30 March 1988 rendered Luxembourg the first EU Member State to incorporate the 1985 UCITS Directive into national legislation and positioned it to take advantage of the cross-border marketing opportunities available to complying funds. The law has been updated by IML Circular of 29 January 1991 and extended by further legislation - Law of 19 July 1991 - relating to UCIs for institutional investors and the Law of 8 June 1999 concerning pension funds. Read the rest of this entry »
Ireland - development of a mutual fund industry dates effectively from the establishment of the IFSC - the International Financial Services Centre -under legislation passed in the late 1980s as one of a number of measures to stimulate growth and employment in an otherwise poorly performing economy and capitalising on the EU’s UCITS Directive. The significant majority of funds established in Ireland are open-ended investment companies, usually listed on the Dublin Stock Exchange, designed for marketing throughout Europe. Under the Irish UCITS Regulations 1989, the Central Bank of Ireland was made responsible for authorising and supervising investment and insurance intermediaries but the Central Bank and Financial Services Authority of Ireland Act 2003 established on 1 May 2003 a single regulatory framework for the financial services industry and created the Irish Financial Services Regulatory Authority (IFSRA), with its own board and chief executive reporting directly to the Minister for Finance. Other relevant legislation includes the Unit Trust Act 1990, the Companies Acts 1963 to 1999, the Investment Limited Partnership Act 1994 and the Investment Intermediaries Act 1995.
France- the most important piece of legislation governing French mutual funds is its Law of 23 December 1988, an Act governing collective investment schemes, actually enacted by decree in September 1989. It replaced two 1979 Acts, which governed SICAV and FCP structures separately, with a single set of regulations, and implemented the 1985 UCITS Directive. Detailed regulations are set out in Application Decrees and Orders dated December 1998 and any points concerning SICAVs not covered in these laws are governed by general legislation, in particular the basic company law dated 24 July 1966. Read the rest of this entry »
Japan - funds analogous to investment trusts existed in Japan in 1937 in the form of investors’ associations, which, like the UK’s Foreign & Colonial Company’s original investment trust, faced challenges of legality and were dissolved in 1940, to be replaced in 1941 by undertakings that, modelled on the UK’s unit trust, found legal support. Post-war confusion led to these funds becoming closed to new investment in August 1945 and final dissolution in February 1950. Read the rest of this entry »
The policy of most jurisdictions is to treat the mutual fund as a company subject to corporate or income tax only on its ordinary business (i.e. net income arising from holding investments), and exempt it from taxation on its gains from buying and selling investments. In the US, provided the gains and net income are distributed, the fund does not pay federal income tax on either. Taxes are the responsibility of and paid by the shareholders under a ‘pass-through’ arrangement, whether they choose to receive cash or reinvest their entitlement. Read the rest of this entry »
Valuation
The value of a mutual fund depends on the prices or values of the underlying securities and other assets held by the fund. The manager must carry out regular valuations of the fund’s property, so that the prices at Which shares or units may be bought and sold can be calculated. Regulations usually prescribe how often Valuations must be performed. In the UK, for example, the required minimum frequency is twice each month The majority of funds are valued on a daily basis, but some managers prefer a weekly valuation, and some carry out more than one each day. Read the rest of this entry »
Korea- like Japan, Korea in the late 1960s needed to mobilise domestic capital to facilitate long-term, stable financing of large-scale industrial and infrastructure projects. The securities investment industry naturally attracted special attention and the Securities Investment Trust Business Act (SITBA) was passed in 1969, to allow the setting up of contractual-type investment trusts, and the first of these, Korea Investment Corporation, was launched that year. Under SITBA, which was implemented by related Presidential Decrees and Enforcement Ordinances, the Ministry of Finance and Economy had, by 1989, authorised three investment trust companies to undertake operations nationwide and five in provincial areas to distribute investment trusts in Seoul and in their respective specified regional areas. Read the rest of this entry »
South Africa - the Collective Investment Schemes Control Act, which updated and replaced previously existing unit trust legislation, was enacted in 2002 and in place at the start of 2003. This Act moved legislation more in line with international best practice and was the subject of negotiation between the trade association and regulatory authorities for some years. The Financial Advisory and Intermediary Services Act (FATS), which became law towards the end of 2002, had as its purpose the regulation of financial planners and advisers, as well as product suppliers, in the giving of advice and the conduct of their business in all areas where other industry legislation did not make specific provision. During its passage as a Bill, it had an impact in terms of how and what advisers were selling, in anticipation of the law. The Financial Intelligence Centre Act, aimed at combating rnoney-laundering activities, brought South Africa into line with international best practice and the subordinate legislation enabling effective practical implementation was in place by year-end 2002. In spite of its name, the Securities Services Act 2004 does not apply to collective investment schemes, nor to activities regulated under FATS, and the Financial Markets Advisory Board, established by the Financial Markets Control Act 1989, continues.
Mutual funds are used by private investors and by institutions for different but overlapping reasons
Private investors use mutual funds to invest money in the hope that it will:
- grow in value, or
- provide income, or
- deliver both, i.e.. capital growth and income either to serve specific financial needs, now or in the future, or simply to enhance their prospect of wealth.
Institutions, particularly life companies and pensions funds, use mutual funds as a convenient way to organise and manage some if not all of their investment portfolios, which will have objectives similar to those of the private investors who are the ultimate beneficiaries. Read the rest of this entry »
In most countries, the regulations stipulate an important safeguard, whereby a fund’s individual holdings are to be registered in the name of an independent custodian or trustee, to ensure that investment in mutual funds is safe, in the sense that the assets cannot be misappropriated by the manager or by the investment adviser. However, this does not prevent fund prices fluctuating, reflecting the value of the underlying investments, and therefore, although ownership is secure, the value of an investment in mutual funds can fall as well as rise.
As with any investment portfolio, a mutual fund can be used for all or any of the following: Read the rest of this entry »
The statistics presented earlier illustrate just how large is the number of mutual funds available. Each fund has specific investment objectives and investment policies, which determine the nature and level of risk; the greater the risk, the greater should be the potential reward. The range of funds available provides a wide spectrum, from very safe, low-risk funds investing in government securities to speculative, high-risk funds investing in new or smaller companies or emerging markets or being highly geared or utilising sophisticated techniques involving derivatives. Read the rest of this entry »
- for mortgage repayment a low-risk investment would
- be sensible, but, if the term is long enough, greater
- risk could be taken in the early years;
- similarly for pension or retirement provision; greater risk can be taken when the investor is young;
- if saving to provide a’start in life’ for children, lowto-meditun risk funds should perhaps be chosen;
- if investing a windfall, such as a legacy, a relatively high risk might be acceptable, on the basis that the funds arose unexpectedly, although hopefully without being reckless.
Read the rest of this entry »
Spain - a new Mutual Fund Law, the ‘CIF Law‘ (35/2003), implemented the expansion of the UNITS Directive and effectively established hedge funds; prior to this, the principal legislation was the Lee de Institutions ones de Inversion Colectiva of 1984 and the Real Decorate de Instituciones de Inversion Collective of 1990, amended in February 2001. Supervisory responsibility is vested in the CNMV - Comision Nacional den Mercado de Valor’s, established by the Securities Market Law which was updated by Law 37/1998. Unusually, there are no institutional funds in Spain but this may change as CNMV’s circular of 3 May 2006 issued rules for hedge funds. Read the rest of this entry »
Canada - laws and regulations are made and enforced by each province and territory, which has its own securities regulator, a government agency usually known as a ‘Securities Commission’. Representatives from each commission serve on an umbrella body, the Canadian Securities Administrators, which occasionally creates national rules. In addition, the Mutual Fund Dealers Association of Canada (MFDA) and the Investment Dealers Association of Canada (IDA) have been formed as Self Regulatory Organisations (SROs) to regulate specific industry groups within certain provinces. SROs are not government agencies but member bodies that operate subject to the oversight of the Securities Commissions.
Australia - the first unit trust to be offered in Australia was named just that - Hugh Dalton’s Australian Fixed Trusts offering units in the First Australian Unit Trust in late 1936, when the funds industry was largely unregulated. The Australian retail funds market is now fully regulated under the provisions of the Managed Investments Act (MIA) and, more recently, the Financial Services Reform Act of 2001, which changed the licens ing and disclosure requirements. The MIA requires managers to take on the duties and obligations of the single responsible entity, whereby they are obligated under statute law to uphold unitholder rights. Under this arrangement, trustee duties have been fused with manager duties, but whilst external custody is not mandatory, the majority of managers use independent custodian services. Superannuation funds also gain the regulatory protection of the MIA, as approximately 90% of these savings are invested in wholesale and retail MIA vehicles. Read the rest of this entry »
