Shortly after Charles was decided by the High Court of Australia, another fixed investment trust was the subject of taxation proceedings. This time, it was before the Supreme Court of Canada in MNR v. TransCanada Investment Corporation Ltd. The trust was a typical fixed investment trust. Under the trust deed, an administrator (i.e. the manager) was to purchase a fixed number of predetermined shares of common stock of companies to constitute a trust unit. Upon all the shares of underlying companies of a unit being vested in the trustee, the trustee would issue shares of a trust unit. Each share of a trust unit represented an undivided equal interest in the unit. Read the rest of this entry »
It is true that where, as here, neither interest is in any way hypothecated or charged, the function of the trustees is simple, but that does not change the inherent character of the function, for the functional possibilities are present, and might at any time be invoked.
Nelson v. Adamson was distinguished as a decision as to what the income arose from, within the meaning of the Income Tax Acts of the United Kingdom. This is the same interpretation of Baker as that by Lord Morison in Reid’s Trustees.59 Read the rest of this entry »
Pricing
When buying or selling either an open-end or closed-end fund, an investor usually knows the current value of the fund’s assets per share (NAV).
For example, to buy an open-end fund with a NAV of $15, an investor pays $15 per share. The fund simply issues new shares to the investor at the current NAV. The assets the fund manages have increased, but the value per share remains the same because the new shares have exactly the same value as the other shares. If the investor sells, he or she is paid the NAV. The amount of assets the fund manages has been reduced, but the NAV of outstanding shares has not changed because the shares redeemed were equal in value to all others.
With closed-end funds, the shares are traded in the open market and are consequently subject to demand/supply imbalances. They may trade at a price greater than their NAV (termed a premium) or at a price below the NAV (termed a discount). Read the rest of this entry »
All freely traded liquid markets share common traits related to psychological pressures (fear and greed), but each differs as to fundamental relationships, trading mechanisms, and structural factors. Each market’s individual characteristics must be understood. Once this understanding has been achieved, proper evaluation of similarities or differences, as well as interrelated pricing effects, with other markets can be accomplished.
One market that allows easy application of Drach’s common stock analysis is closed-end funds, also known as publicly traded funds or closed-end investment trusts (CEITs).
Although one of the oldest forms of investment, closed-end funds are among the most misunderstood and consequently often overlooked investment areas. Their origin can be traced back to the establishment of a Belgian fund in 1822; thereafter they flourished, particularly among English and Scottish investors in the latter 1800s. The first U.S. fund was formed in 1893 and, until the time of the stock market crash of 1929, closed-end funds were the dominant form of publically owned investment companies. Read the rest of this entry »
In the common stock investment techniques, the most obvious hedging strategy might be to be long the stocks that are relatively discounted and sell short those that appear most overpriced. However, the process is not so simple.
Because of the composition of the Master List, the stocks as a group tend to do significantly better than the market as a whole. Consequently, although the long positions have significantly outperformed the broadly based market, the short positions, if sold, will likely provide lesser returns than the overall market.
It is because of the Master List’s positive bias that in hedging accounts Drach utilizes writing index call options as a substitute for the short side. This substitution both eliminates the effect of the Master List’s upside bias that would be experienced in attempting to short Master List stocks and provides added profitability for the short side because of premium capture. As discussed in Chap. 9, the method of going long the selected Master List issues and proportionately shorting (selling) index call options is a lethargic process, which has so far produced a constant annualized return of about 15 percent irrespective of overall market conditions. Read the rest of this entry »
Nearly all of the mutual fund families offer multiple funds that are geared toward international investing. The different kinds of funds can be categorized into index funds, international funds, regional funds, country funds, emerging market funds, and global funds. International mutual funds have higher expense ratios than domestic mutual funds to cover higher trading costs and higher management fees. The funds also tend to have redemption fees to control frequent trading. Examples of funds offered by major mutual fund companies are given below.
* Index funds. These include Fidelity Spartan International Index Fund, Vanguard Developed Markets Stock Index, Vanguard Emerging Markets Stock Index, and Price International Equity Index Fund.
* International funds. These funds do not invest in the domestic market. Funds include Fidelity International Growth, T. Rowe Price International, Fidelity Overseas, Vanguard International Growth, Fidelity Diversified International, and so on.
* Global funds. These funds invest in all countries, including the domestic market, and include Templeton World, GT Global Worldwide, Dreyfus Global, Vanguard Global Equity, Price Global Stock, and so on. Read the rest of this entry »
Buying foreign stocks is cumbersome for an individual investor because it requires currency conversion, opening an account with a foreign broker, taking custody of a foreign company’s shares, and all the associated transactions. Many domestic brokers now offer trading in foreign stocks, but it is still a lot more difficult to buy and sell foreign stocks than it is to trade domestic stocks.
There are, however, alternatives available that do not require direct trading on foreign stock exchanges. These are American depository receipts (ADRs), mutual funds, exchange-traded funds, and multinational companies. Details are provided below.
ADRs are negotiable registered certificates that stand in for the underlying stock of foreign companies. A U.S. bank (called a custodian bank) holds shares of foreign companies and issues receipts (ADRs) against those shares. There could be one ADR for several shares or several ADRs for one share of stock—the custodian bank picks a ratio that puts the ADR in a tradable range of $50-100. For example, each share of British Petroleum is subdivided into six ADRs and each share of British Airways is equal to ten ADRs, while two Honda shares make one ADR but one Sony share is equal to one ADR. Read the rest of this entry »
To give you a sense of how fund shareholders are serviced, let’s follow a typical series of transactions beginning immediately after a prospective customer decides to purchase fund shares. In the first step, the customer completes and returns an application for opening a new account to the transfer agent. The application may be returned in a number of ways, including by mail, at a branch office (if one exists locally) or through the Internet. Once the transfer agent receives the application, the transfer agent determines whether it is in good order. Although the definition of “in good order” can vary somewhat among fund complexes, many core elements are consistent. The transfer agent always makes certain to obtain a social security number or taxpayer identification number (in the case of corporate accounts) for tax reporting purposes. The transfer agent also ensures that the initial funding amount complies with any account minimums specified in the fund’s prospectus. If there is any issue with the application, the application is considered to be “not in good order.” In that event, the establishment of the account and the purchase of fund shares may be delayed until the issue can be resolved with the customer. Read the rest of this entry »
- Use of a broker affiliated with a fund A fund management company may have an affiliated broker-dealer and may use that broker-dealer to trade under certain circumstances. For example, Merrill Lynch may act as a broker on behalf of a fundfund to the NYSE for executionbroker in the trading crowd or an order held by the NYSE specialist. Rules adopted by the SEC under the 1940 Act generally permit a broker who is affiliated with a fund’s adviser to effect trades for the fund as an agent, so long as the commission charged is no more that the “usual and customary” commission prevailing in the market. The SEC’s rules require a fund’s board of directors to adopt procedures that are designed to monitor compliance in this regard and to make determinations on at least a quarterly basis that all trades carried out by a fund’s affiliated broker meet the “usual and customary” commission standard.
Although an affiliated broker may act as agent for the fund (and receive a brokerage commission for executing the fund’s trades), the 1940 Act broadly prohibits a fund’s adviser and affiliates of an adviser from acting as a dealer in relation to the fund—that is, from selling any security or other property to (or purchasing any security or property from) the fund. This core provision of the regulatory scheme is intended to preclude conflicts of interest that could arise if a fund’s affiliated broker “dumps” unwanted securities from its inventory into the portfolio of the fund. Read the rest of this entry »
Back-end loads are a sales commission levied by some load funds when an investor sells mutual fund shares. These back-end loads typically are structured as a contingent deferred sales charge (CDSC), which often start at 5% or 6% of money withdrawn within a year of buying the fund and then decline by a percentage point or so each year until they disappear. Back-end loads usually are set to compensate the distributor for marketing and selling the fund, especially to protect anticipated annual flows of 12b-1 fees. However, back-end loads may also be used to dissuade short-term traders; funds may set a high back-end load for money withdrawn within a very short time frame and then revert to the more general schedule of yearly declining load amounts referenced above. Read the rest of this entry »
The Problem
Since the beginning of 1997, the U.S.-sold Japan Fund has experienced substantial cash inflows and outflows from investors, and portfolio manager David Smith has voiced his concern recently about the volatility. He also noted that extremely large shareholder orders seem to coincide more and more with news affecting Japan, and cash flow management is taking up a large percentage of his time that might otherwise be spent selecting securities.
Smith suspects some shareholders are trying to increase their profits by “timing” the market—quickly moving their money from one fund to another within the complex. Furthermore, he speculates that these investors might be attempting to profit from the methodology that the fund complex uses to compute the daily NAV of the fund by trading on stock price information that may become available between the time when the Japanese markets close and the time the fund values its holdings. Read the rest of this entry »
In reviewing the expenses of mutual fund investors, it is useful to distinguish between expenses paid directly by shareholders as individual investors and expenses paid by the fund itself (which are paid indirectly by all fund shareholders). In general, fees related to distribution and redemption are paid by shareholders at the time of a specific event, while fees related to management and service are paid by the fund on an annual basis. But this general rule has a few exceptions—most important, 12b-1 fees, which are continuing distribution charges borne by funds as a percentage of their assets.
Sales loads are the most significant fees charged to shareholders individually. Sales loads are paid to the fund distributor, usually affiliated with the fund management company, and mostly passed on to the broker who helped close the sale. The maximum sales load is 81A%, though as a practical matter, sales loads now average 4% or 5%. Historically, all sales loads were paid by shareholders when purchasing fund shares at the front end of their investment and therefore were called front-end loads. Read the rest of this entry »
Despite the absence of SEC rules on fund participation in the governance process of publicly traded companies, mutual fund complexes routinely vote their proxies on items submitted to stockholders for approval. (Such proxy voting should be considered part of the normal exercise of fiduciary duties, as distinct from institutional activism, discussed below.) In voting proxies, fund advisers generally follow written guidelines that have been approved by the independent directors of the funds. The fund adviser typically processes and votes all proxies for shares held by the funds in accordance with these guidelines. On an annual basis, the fund adviser usually submits a report on proxy voting matters to the board of directors of the funds or a committee of the board. Read the rest of this entry »
C. Inadequate Proxy Disclosure
The quality of the proxy information provided to shareholders in most other countries is generally much less comprehensive than in the United States. In many countries, companies provide only the most basic information describing the proposals to be voted on at a shareholders‘ meeting. There is generally very little or no disclosure information related to executive compensation, a valuable aspect of U.S. proxy statements. Nor is there much information about a company’s pension liabilities, interested transactions or business segments in any disclosure documents distributed by most foreign issuers. Moreover, in many countries, proxy information need be published Read the rest of this entry »
D. Operational and Logistical Challenges to Exercising Shareholder Rights
In addition to the substantive disadvantages that U.S. shareholders often face overseas, a variety of operational challenges can frustrate the exercise of shareholder rights abroad.’ For example, in the United States, most institutional shareholders are able to submit their proxy votes electronically through a system called Proxy Edge. Outside the United States, by contrast, there currently exists no method for voting shares electronically. Rather, U.S. institutional investors Read the rest of this entry »
E. Recent Improvements
Notwithstanding the difficulties outlined above, many U.S. institutional investors attempt to exercise their voting rights in many markets around the world. As in the United States, mutual fund complexes are rarely activist overseas, although an institution may become involved when fundamental factors affecting the value of its investments are at issue. Indeed, as their foreign holdings increase in size, institutional investors have recently become more successful in certain situations in asserting their rights as shareholders. For example, in 1997, institutional investors in the French company Eramet, including Fidelity Investments and TIAA-CREF, successfully forced the company to abandon a politically motivated and financially damaging plan to dispose of assets engineered by the French government, its majority shareholder. Read the rest of this entry »
Realistically, greed is such a powerful force at times that it’s difficult to find that coolly rational place that allows you to stop your investing reflex. You come across a stock that you’re convinced is going to take off, and you feel every second you delay represents many dollars lost. In these situations, it’s all you can do not to sell the house and use the proceeds for this investment.
Developing a disciplined mindset can help you deal with these tempting situations. By disciplined, I mean you must be in a highly conscious, analytical state when you make an investment decision. Even as your greed is pushing you to rush forward or buy more, your discipline provides you with more rational alternatives. How do you develop discipline? I’ve suggested a few techniques earlier, such as imposing a 5 percent limit and gathering sufficient information before acting. Here are some additional ways to do so:
-
USE A METHOD OR A PROCESS BEFORE MAKING AN INVESTMENT DECISION
Whether it’s going through a mental checklist of things you need to do before taking action or employing a series of questions that must be answered to your satisfaction, a process ensures that you won’t act based only on an overwhelming desire to make money quickly. 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 »
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 »
Buying and selling
Although some funds are exchange-traded, the shares or units of most mutual funds are bought and sold by making an application to the manager. This can be in writing, by telephone or via the Internet, directly by the investor or by the investor’s adviser or agent. Many managers have pre-printed application and redemption forms and their advertisements and other promotional mailing material often include an application form. Once accepted by the manager, applications constitute a binding contract, and the manager issues a contract note stating the details of the transaction.
For purchases, payment can be included with the application. Some managers may insist on this for the initial investment of a first-time investor. Alternatively, the contract note will specify when payment is required. For large investments, the manager may be required by law to obtain confirmation of the investor’s identification and of the source or destination of money involved in the transaction: if there is any suspicion that the money is being laundered, or used to support terrorist activity, the suspicion must be reported to the authorities. Read the rest of this entry »
