In crude terms, in a unit trust, the manager performs all the functions of management of the trust assets that would have been carried out by the trustee if the trust were a private trust used as a means of disposition of properties. This leads to the question whether the manager can be considered as a trustee, by analogy to the statutory scheme contained in the Public Trustee Act 1906 that allows the simultaneous appointment of a custodian trustee and a managing trustee. A custodian trustee under this Act is one who gets in and holds the title to the trust property. The management of the trust property and the exercise of any power or discretion are vested in the managing trustee. As between the custodian trustee and the managing trustee, a custodian trustee has the custody of all securities and documents of title relating to the trust property, but the managing trustee is permitted free access to them and is entitled to take copies or extracts. A custodian has to concur in and perform all acts.’” Read the rest of this entry »
The trust has achieved a separation of the legal and equitable ownership by imposing on the legal owner, the trustee, an obligation to hold the trust properties for the benefit of the beneficiaries. That obligation is a characteristic feature of the trust. The unit trust involves a split of that trust obligation into the custody of the trust corpus and the management of that corpus. If the trust is a manipulation of the facets of ownership’ resulting in a two-party relationship, the unit trust is a furtherance of that manipulation which results in a tripartite relationship. Read the rest of this entry »
In respect of the manager, the following functions and duties are conferred explicitly or implicitly by the statutory provisions or trust deeds:
(1) Dealer in units.
One of the attractions of a unit trust is liquidity. The manager has since the early days of the unit trust been the provider of a ready market for the acquisition and disposal of units of schemes under its management. Under the Financial Services (Regulated Schemes) Regulations 1991, the manager must at all times during the dealing day be willing to issue units and be willing to redeem units. Similar provisions may also be found in trust deeds of non-authorized unit trusts. Read the rest of this entry »
(1) Statutory Allocation of Powers and Duties
Against this background, a structure of dual administration in the unit trust is a logical step in the functional specialization of the powers and responsibilities previously found in the single person of the trustee. The unit trust was in the forefront of this development. The first regulation of unit trusts in the United Kingdom in 1939 made the trustee-manager structure a model for the management of unit trusts. This model was adopted by many statutes of common law countries and was followed closely by unregulated schemes. Read the rest of this entry »
Management’s income is usually based on a percentage of the market value of the securities in the fund. The larger the asset base is, the greater the income. Both open- and closed-end fund managers are (at least theoretically) compensated to provide superior investment performance. If the value of the assets being managed grows, the management fees expand proportionately. In addition to pressures associated with performance, the open-end fund manager is faced with problems that can arise form variable capitalization.
Statistically, there is virtually no question that the popularity of both closed-end and open-end funds varies with market conditions. When the market is high, especially during periods of excessive speculation, open- end mutual fund sales increase (sometimes very dramatically), and there is an increase in the number of new closed-end funds. When the market is depressed, open-end sales decline (sometimes redemptions dominate), and there are few new closed-end funds formed. Read the rest of this entry »
In an industry that has seen its share of fads, Vanguard has long stood as a symbol of low costs and plain-vanilla products. Founded by John Bogle in 1975, the Vanguard Group is now the second largest mutual fund complex in the United States and has inspired a loyal following among many of its shareholders.
Low-cost funds have been Vanguard’s hallmark— and one of its main rallying cries within the industry. Its ability to provide funds with low expense ratios depends on the company’s unusual business model. In the Vanguard Group, the management company is actually owned by shareholders of its member funds. Read the rest of this entry »
The HHI takes into account the relative size and distribution of the firms in a market and approaches zero when a market consists of a large number of firms of relatively equal size. The HHI increases both as the number of firms in the market decreases and as the disparity in size between those firms increases. Markets in which the HHI is between 1,000 and 1,800 points are considered to be moderately concentrated, and those in which the HHI is in excess of 1,800 points are considered to be concentrated. During the 1990s, the HHI for the U.S. Mutual fund industry saw a minor decrease from 396 to 352 based on assets under management,6 indicating that the industry was, and still is, fairly unconcentrated according to this statistical measure.
Another fairly unconcentrated financial industry—domestic commercial banks (including thrifts)—has an HHI of 338, based on deposits of $3.4 trillion as of December 31, 2000. A subset of that universe—domestic money center banks— is much more concentrated, with an HHI of 1,676, based on deposits of $1.5 trillion. In comparison, the U.S. airline carrier industry has an HHI of 1,330, based on 2000 revenues. Read the rest of this entry »
Despite the huge growth of mutual funds, the marked shift in fund types and the creation of new distribution channels, the concentration of market share within the fund management industry remained remarkably stable during the 1990s. The industry has continued to be led by 10 fund managers with 45% to 55% of all mutual fund assets under management and 25 managers with 70% to 75% of all mutual fund assets under management. But many of the leaders changed places over the decade—some because of strong performances and others due to mergers and acquisitions. At the same time, the number of fund complexes overall has continued to increase as new fund managers have taken advantage of the mutual fund industry’s low barriers to entry.
1. Overall industry concentration and turnover In 1990, there were 464 mutual fund complexes, of which the top 10 managed 56% of total industry assets and the top 25 managed 76% of total assets. By the end of 2000, the mutual fund industry was modestly less concentrated at the top. There were 654 complexes at that date, with the top 10 accounting for 46% of total assets and the top 2, accounting for 71% of total assets.The list of top 25 fund complexes has changed significantly, with some complexes dropping out and others stepping in. Read the rest of this entry »
Earlier this year, two mutual fund management companies, American Guardian, Inc. and Best Management, Inc. entered into an agreement under which American Guardian would purchase all of the issued and outstanding stock of Best Management and merge Best Management into American Guardian. Although the companies are now combined, there are still two separate boards of directors for the funds. Each fund complex retained the same independent board members previously elected by the shareholders, but company-appointed directors were reevaluated and will be consistent for both boards. The combined entity, Best American Management, is now in the process of reviewing existing products and services and looking for opportunities to leverage its increased size.
American Guardian was a 30-year old Boston-based mutual fund complex. This fairly staid, conservative company was well known but had not been particularly innovative in fund distribution or shareholder servicing. It had historically chosen to distribute mainly through broker- dealers and outsourced its transfer agent process. The relatively new CEO of American Guardian firmly believed that in today’s highly competitive environment, mutual fund complexes must “grow or die.” He saw an acquisition as a necessary step to ensure that his firm’s products and services would be attractive to investors and their advisers in the future. Read the rest of this entry »
The Class B structure creates challenging financial issues for the fund sponsor This structure carries inherent risk in that the fund’s NAV could decline substantially, decreasing the amount of 126-1 fees and CDSCs received by the sponsor, possibly below the amount it advanced to the broker-dealer. This is especially a risk for an equity fund sponsor, since equity assets are more volatile than other asset types. In recent years, many fund sponsors have sought relief from the risk that the CDSC arrangement entails by taking advantage of new methods of financial engineering developed by banks and investment banks. These methods enable fund sponsors to reduce or eliminate this risk by securitizing and selling the future cash flows from 12b-1 fees and CDSCs. For example, consider a fund sponsor that has just paid a broker a 4% commission for selling Class B shares of a growth find. Rather than wait to recoup this commission via 12b-1 fees and/or CDSCs, the sponsor may sell the rights to these future cash flows to an unrelated party in exchange for a modestly lower payment today. This sale effectively protects the sponsor against the risk associated with a possible downturn in the equities market and consequential decline in cash flows from 12b-1 fees and CDSCs. Read the rest of this entry »
Over the past few years, the merger activity in the mutual fund industry has sharply accelerated. Some of the mergers involved fund companies trying to fill out their line of products. An illustration is the acquisition of Templeton’s management company, which has a strong reputation for international stock funds, by Franklin’s management company, with its heavy emphasis on bond funds. Other mergers involved institutionally oriented securities firms seeking more distribution to retail investors. An illustration is the acquisition of Dean Witter, a retail wire house, by Morgan Stanley, with its institutional client base. Still others involve banks that want to gain a foothold in the mutual fund industry. An illustration is the acquisition of Dreyfus, an investment manager for a broad line of mutual funds, by Mellon National Bank. The following case study discusses several mergers in the mutual fund industry and the early results of the consolidations. Read the rest of this entry »
In most cases, mutual fund advisers vote to support the recommendations of company management. This is true not only for management’s proposed slate of directors, which routinely receive the support of 99% of those voting, but also for management proposals on other subjects. For instance, during the 2000 proxy season, management proposals on proxy statements were supported on average by 85% of the stockholders who voted; proposals opposed by management were opposed on average by 74% of the stockholders who voted. This high level of consensus between stockholders and management is not surprising, at least for actively managed mutual funds. Owning the stock of a company ordinarily indicates a belief in the ability of the company’s management; supporting management’s position in voting matters often follows as a matter of course. Read the rest of this entry »
Investment advisers to actively managed funds devote tremendous resources to researching companies and industries. As part of that research, employees of such fund advisers meet regularly with company executives to discuss business results and trends. The analyst assigned to a company usually has detailed knowledge about the company’s business strategy and financial performance, as well as the quality of its management. Read the rest of this entry »
As illustrated by the above discussion, mutual fund advisers usually play an important, although often passive, role in corporate governance, evaluating management and stockholder proposals and voting in accordance with policies designed to further the interests of their funds. In recent years, however, mutual fund advisers have encountered an increasing number of proposals from stockholder activists, and in limited circumstances they have been among the activists pushing for such proposals. Read the rest of this entry »
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 »
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 »
Establishment
Establishing a mutual fund follows a similar procedure in all countries. First, a management company determines the investment opportunity for a fund with a particular investment objective and policy, then decides its appropriate type or construction, either the corporate type, as an investment company, or the contractual type, as a unit or investment trust. It is worth noting that, in law, only the corporate type has a’legal personality’.
Usually in conjunction with an independent custodian, depositary or trustee, the fund’s constitutional documents are prepared and executed as legally binding instruments. The officers and agents, such as the investment manager, transfer agent, selling agent, administrator, auditor, are identified and then the terms and conditions upon which the fund will be offered and operated are settled and the charges and tees of the various parties agreed. Application for authorisation is then made to the relevant authority. Read the rest of this entry »
Several charges are associated with mutual funds, although they need not all apply to every fund. Charges are the costs that investors pay for the administration and management of their investment, applied in one of three ways:
- as part of the share or unit price paid upon entry to the fund;
- as a direct charge rendered separately from the amount of the investment;
- paid from the property (assets) of the fund.
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Each mutual fund has one or more investment objectives. For example, to provide an above-average and increasing income and a yield about 50% higher than the relevant index. It is the investment manager’s task to achieve these objectives, by pursuing a stated investment policy. Each investment management company will adopt an appropriate policy for each of its funds hut will tend to have an overall ‘house style’ or strategy. Two contrasting approaches are:
- Bottom up’. Known as stock-picking. The manager looks for outstanding individual companies. They can be identified from research reports or from personal knowledge of their products, services and management.
- Top<down’. Starts with asset allocation. The manager reviews world or national economy trends first, determines his asset allocation model in terms of geographic and industrial spread, then examines industries in detail and finally selects companies that will benefit from the trends.
Another contrast in styles between different houses is between passive and active management. passive management occurs when portfolio changes are made cannot be breached by the investment manager, Regulations usually will specify also that the investment objectives and policy as set out in scheme documents cannot be changed materially without approval by vote of the share- or unit holders. Read the rest of this entry »
Shares in mutual funds can be sold directly by the fund or by its management company to investors, or through agents employed by the fund or management company as sales agents or representatives in a sales force. Managers may also sell funds through independent intermediaries acting either as agents for their clients or simply as selling agents who employ consultants to provide advice and support but selling directly to the public.
In the US, mutual funds typically sell their shares through a separate organisation known as a principal underwriter or distributor, and only in a few instances will the fund sell its own shares. The independent intermediaries are usually firms set up as broker-dealers. Read the rest of this entry »
