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Simply stated, equity funds hold primarily stocks, bond funds hold bonds, and hybrid funds hold some combination of the two. Within these three broad categories, however, a mutual fund’s objectives can vary widely. It is important to consider a fund’s stated objectives.

Mutual Fund Objectives The board of directors (trustees) of an investment company must specify the objective that the company will pursue in its investment policy. The com-panies try to follow a consistent investment policy, according to their specified objective.

Investors should be able to count on mutual funds to pursue their stated objectives.

Exhibit 3-1 shows some major categories of investment objectives, most of which are for equity and bond funds. There are two categories for money market funds.²¹Of course, funds within one of these categories, such as capital appreciation funds, may hold quite different securities.

Example 3-4

“Equity-Income seeks reasonable income by investing mainly in income-producing equity securities. In selecting investments, the fund also considers the potential for capital appreciation.”

20Investors searching for safe assets in which to invest got a shock in 20072008 when the auction-rate securities market froze up, leaving investors stranded. These securities were touted as cash equivalents but failed as a marketable security.

21Current statistics and useful information about investment companies can be found at the Institute’s website http://

www.ici.org/.

Some believe it is important to describe a fund’s investment style and actual portfolio holdings rather than state that the fund is seeking “capital appreciation (as one example),”

which could be accomplished in several different ways. Morningstar, Inc., a well-known Chicago mutual fund researchfirm, pioneered a nine-cell matrix to describe a fund’s investing style. For equity funds, for example, the style box uses the categories“large-cap,” “mid-cap,”

“small-cap,” “value,” “blend,” and “growth” to describe investment styles.²²A red dot called a

“fund centroid” represents a weighted average of the domestic stock holdings.

E X H I B I T 3 - 1

Mutual Fund Investment Objectives

The Investment Company Institute has categorized U.S. mutual funds according to 13 broad investment classifications.

EQUITYFUNDS

 Capital appreciation funds seek capital appreciation; dividends are not a primary consideration.

 Total return funds seek a combination of current income and capital appreciation.

 World equity funds invest primarily in stocks of foreign companies.

HYBRIDFUNDS

 Hybrid funds may invest in a mix of equity and fixed-income securities.

TAXABLEBONDFUNDS

 Corporate bond funds seek current income by investing in high-quality debt securities issued by U.S. corporations.

 High-yield funds invest two-thirds or more of their portfolios in lower-rated U.S. corporate bonds (Baa or lower by Moody’s and BBB or lower by Standard and Poor’s rating services).

 Government bond funds invest in U.S. government bonds of varying maturities. They seek high current income.

 Strategic income funds invest in a combination of U.S. fixed-income securities to provide a high level of current income.

 World bond funds invest in debt securities offered by foreign companies and governments. They seek the highest level of current income available worldwide.

TAX-EXEMPTBONDFUNDS

 National municipal bond funds invest primarily in the bonds of various municipal issuers in the United States. These funds seek high current income free from federal tax.

 State municipal bond funds invest primarily in municipal bonds issued by a particular state. These funds seek high after-tax income for residents of individual states.

MONEYMARKETFUNDS

 Taxable money market funds invest in short-term, high-grade money market securities and must have average maturities of 90 days or less. These funds seek the highest level of income consistent with preservation of capital (i.e., maintaining a stable share price).

 Tax-exempt money market funds invest in short-term municipal securities and must have average maturities of 90 days or less. These funds seek the highest level of income—free from federal and, in some cases, state and local taxes—consistent with preservation of capital.

SOURCE: 2004 Mutual Fund Fact Book, Copyrightª 2004 by the Investment Company Institute (www.ici.org). Reprinted with permission.

22“Cap” refers to capitalization, or market value for a company, calculated as the price of the stock times the total number of shares outstanding. A mutual fund that invests in stocks with a median market cap of $5 billion or more would be considered to be a large-cap fund, while a small-cap fund is one with a median market cap of $1 billion or less.

Exhibit 3-2 shows the investment style for Equity-Income Fund as shown in their prospectus, and as supplied by Morningstar. This fund concentrates on large-cap stocks using a value approach.²³

Value Funds vs. Growth Funds Many equity funds can be divided into two cate-gories based on their approach to selecting stocks, value funds and growth funds.

l A value fund generally seeks to find stocks that are cheap on the basis of standard fundamental analysis yardsticks, such as earnings, book value, and dividend yield.

l Growth funds, on the other hand, seek tofind companies that are expected to show rapid future growth in earnings, even if current earnings are poor or, possibly, nonexistent.

Value funds and growth funds tend to perform well at different times because value stocks and growth stocks perform well at different times, each having its own cycle. Therefore, value fund investors will have a run when they do well, and growth fund investors will have similar runs.

Example 3-5

In the late 1990s growth funds had a big run. With the strong emphasis on dot.coms and technology stocks, value funds performed poorly. Some growth funds had triple-digit returns, and some value managers quit the business. The situation reversed in 2000, however, with the average equity value fund gaining almost 10 percent for the year while the average growth fund lost almost 12 percent. Value funds outperformed growth funds during the bear market of 20002002 by a wide margin.

E X H I B I T 3 - 2

Investment style for Fidelity’s Equity-Income Fund Growth

Blend Value Large

Mid

Small

Current Historical

SOURCE: On-line Prospectus for Equity-Income Fund, with permission of Morningstar, Inc.

23Lipper Inc., an alternative provider of investment company information, announced a new classification system for U.S. diversified equity mutual funds, effective mid-1999, to replace its “General Equity Investment Objectives.” Funds are assigned to one offive investment objectives: aggressive equity, growth equity, general equity, value equity, and income equity. The market capitalization of the funds is also recognized—for example, large-cap funds—and a special size category,flexible-cap range, was created for the roughly 1,500 funds that do not fit regularly into size categories.

Lipper indexes for mutual fund categories are carried daily in The Wall Street Journal.

A more risk-averse investor worrying about a market decline may wish to emphasize value funds, while more aggressive investors seeking good performance in an expected market rise would probably favor growth funds. Given the evidence on efficient markets discussed in Chapter 12, the best strategy is probably to buy both types of funds.

Index Funds Mutual funds designed to replicate a market index such as the Standard &

Poor’s 500 Composite Index (explained in Chapter 4) are called index funds. The first index fund was started in 1976 by John Bogle (former CEO of Vanguard), and it is now one of the largest mutual funds in terms of assets—Vanguard’s 500 Index Fund. In 1990, there were only 15 index mutual funds, and by the beginning of 2012 there were 365 index mutual funds with assets totaling $1 trillion. These index funds covered a wide variety of indexes, both domestic and international, and both debt and equity. However, almost 40 percent of the assets in index mutual funds are indexed to the S&P 500 Index. The majority of index fund assets are in funds sold directly to investors by mutual fund companies (such as Vanguard and Fidelity) as opposed to being sold indirectly through financial advisers such as brokerage firms.

Equity index funds now account for about 15 percent of all equity mutual fund assets at the beginning of 2012.

3 An index fund is an unmanaged portfolio of securities designed to match some market index; it typically has a low expense ratio.

Index funds have lower expenses because they are “unmanaged” funds seeking only to duplicate the chosen index. While the typical actively managed equity traditional has operating expenses of approximately 1.5 percent of assets annually, the typical index fund has expenses of only 0.56 percent, and Vanguard’s 500 Index Admiral fund has an amazingly low expense rate of 0.05 percent.

How have index funds fared in recent years? Over a recent 20-year period, the average actively managed large-cap fund realized 1.7 percentage points less than the S&P 500 Index on an annual basis. Therefore, S&P 500 index funds outperformed these actively managed funds.

Of the actively managed funds in operation since 1976 when thefirst index fund was created, only one in four has managed to outperform Vanguard’s 500 Index Fund.

S o m e P r a c t i c a l A d v i c e Investors buying mutual funds have several sources

from which to choose, and therein lies the danger.

For example, one study found that mutual funds run by insurance companies underperform other funds.

On average, shareholders fell behind by 1.5 percent-age points a year.²⁴

Investors can buy no-load funds from the com-panies themselves, or buy through a broker. Half of all investment in mutual funds is made through brokers.

However, a recent study finds that “[f ]unds sold by

brokers underperform those sold through the direct channel.”²⁵ Investors in one recent year paid some

$15 billion in sales charges and distribution fees alone (management fees were $24 billion).

There are numerous index funds today, and expenses vary widely. Investors need to do due dili-gence when selecting an index fund to be sure that the expenses are reasonable. After all, if the Van-guard fund can match the S&P 500 Index with an expense ratio of 0.05 percent, why pay 0.50 percent,

24Tong Yao, Xuanjuan Chen and Tong Yu,“Prudent Man or Agency Problem? On the Performance of Mutual Funds,”

Journal of Financial Intermediation, 86, 3, 2007, pp. 175203.

25Daniel Bergstresser, Peter Tufano, and John Chalmers,“Assessing the Costs and Benefits of Brokers in the Mutual Fund Industry,” Social Science Research Network, October 1, 2007.

Index Funds Mutual funds holding a bond or stock portfolio designed to match a particular market index

or 0.70 percent, to do the same thing? In fact, excluding Vanguard, the average S&P 500 index fund charges 0.82 percent. Furthermore, total costs for index funds can be amazingly large. For example, one well-known S&P 500 Index Fund has an expense ratio of 0.60 and also charges a 5.25 percent load charge.

To accomplish the same thing as Vanguard’s S&P 500 Index Fund, why would you give up 5.25 percent of your money off the top, and pay an annual expense ratio 12 times as large Vanguard’s?

Bottom line: Investors should think carefully about where and how they buy their mutual funds.

Checking Your Understanding

3. Why are money market funds the safest type of mutual fund an investor can hold?

4. Why might investors prefer a hybrid fund to either a stock fund or a bond fund?

5. Why is it reasonable to expect growth funds and value funds to perform well over different periods of time?

In document Derecho administrativo global: una teoría normativa. (página 174-178)