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The Fund Industry: How Your Money is Managed, 2nd Edition


Praise for The Fund Industry, Second Edition

"This book provides an excellent overview of all aspects of the fund industry—from portfolio management to marketing to regulation. It will be an invaluable tool for those working in the industry and a genuinely helpful guide for fund investors."
—Mary Schapiro, Former Chairperson of the Securities and Exchange Commission

"This book is a must read for the millions of U.S. investors who own mutual funds. It clearly explains how your funds are managed and how your retirement accounts are administered."
—Jack Brennan, Former CEO of Vanguard

"We're using this book as a textbook for seasoned managers who want to develop a broader view of our industry, to great reviews from all! I wish that I had this book when I joined the fund industry. It clearly articulates how the various parties in the industry connect."
—Etta Valdes, Vice President, American Funds Training and Development

"This book will greatly enhance your understanding of the fund industry. It describes how money is managed, how portfolios are constructed, and how valuations are established; provides tools to help you research and compare funds, looking at their performance, risk, and expenses; and discusses the growing importance of funds around the globe. It's rare to find so much useful information in a single book."
—Mohamed El-Erian, Former Co-CEO of PIMCO

"Everything you need to know about mutual funds, explained in clear and simple language—a great jargon buster."
—John Kay, Financial Times columnist and visiting professor, London School of Economics

ROBERT POZEN is Senior Lecturer at Harvard Business School and a Senior Fellow at the Brookings Institution. During his distinguished career, he has been active in business, government, and academia. From 1997 to 2001, he was President of Fidelity Management & Research Co. From 2004 to 2011, he was executive Chairman of MFS Investment Management, which now manages over $400 billion in assets.

THERESA HAMACHER, CFA, is president of NICSA, a trade association serving the global investment management community. She is the former CIO for Pioneer Investment Management USA in Boston, Massachusetts. Previously, she was the CIO for Prudential Mutual Funds in Newark, New Jersey.

Foreword Robert J. Shiller xi

Preface to the Second Edition xiii

Acknowledgments xvii

SECTION ONE An Investor’s Guide to Mutual Funds

CHAPTER 1 Investing through Mutual Funds 3

Advantages and Disadvantages of Mutual Funds 4

History and Growth 8

Regulators and Industry Associations 16

Chapter Summary 22

Notes 23

CHAPTER 2 How Mutual Funds Work 27

Buying and Selling Fund Shares 28

The Pass-Through Tax Status of Mutual Funds 31

A Virtual Corporation 34

Ethical Standards 41

Alternatives to Mutual Funds 46

Chapter Summary 52

Notes 53

CHAPTER 3 Researching Funds: The User Guides 57

Mutual Funds and Disclosure 57

The Summary Prospectus 62

Beyond the Summary Prospectus 69

Using the User Guides 75

Chapter Summary 76

Notes 77

CHAPTER 4 Comparing Mutual Funds 79

Delineating Your Own Investment Objectives 80

Evaluating Performance 83

The Taxonomy of Mutual Funds 88

Chapter Summary 101

Notes 102

CHAPTER 5 The Cost of Fund Ownership 105

The Focus on Fund Expenses 105

Distribution Expenses 109

Operating Expenses 117

The Management Fee 119

The Active versus Passive Debate 128

Chapter Summary 133

Notes 134

SECTION TWO Mutual Fund Portfolio Management

CHAPTER 6 Portfolio Management of Stock Funds 139

Stock Research 140

Putting It All Together: Managing a Stock Fund 151

Chapter Summary 164

Notes 165

CHAPTER 7 Portfolio Management of Bond Funds 169

Bond Fund Holdings 169

Putting It All Together: Managing a Bond Fund 181

Chapter Summary 187

Notes 188


Funds and Derivatives 191

Uses of Derivatives in Funds 192

Regulation of Derivatives in Funds 194

Notes 197

CHAPTER 8 Portfolio Management of Money Market Funds 199

Money Market Funds and the Financial System 200

Rule 2a-7 202

Money Market Fund Holdings 210

Putting It All Together: Managing a Money Market Fund 214

Chapter Summary 217

Notes 218

CHAPTER 9 Implementing Portfolio Decisions: Trading 223

The Importance of Trading 224

The U.S. Stock Markets 225

The Role of the Mutual Fund Trader 236

Trading in Bond Funds 243

Chapter Summary 245

Notes 246

CHAPTER 10 Mutual Funds as Stockholders 249

Mutual Funds and the Proxy Voting Process 249

Proxy Voting by Mutual Funds 253

Activism and Mutual Funds 258

Current Issues in Proxy Voting 264

Proxy Voting Outside the United States 266

Chapter Summary 268

Notes 269

SECTION THREE Sales and Operations

CHAPTER 11 Retail Distribution 275

What Sells Mutual Funds? 276

Distribution Channels 277

Fund Platforms 284

Distribution Strategy 290

Chapter Summary 295

Notes 296

CHAPTER 12 Retirement Saving through 401(k) Plans 301

The Benefits of Tax-Deferred Saving 302

History and Growth of 401(k) Plans 304

Contributions to 401(k) Plans 310

Investment Options in 401(k) Plans 312

Target Date Funds 316

Plan Administration 319

Chapter Summary 320

Notes 321

CHAPTER 13 Other Retirement Planning Options 325

Individual Retirement Accounts 326

Variable Annuities 332

The Future of Retirement Income in the United States 334

Chapter Summary 339

Notes 339

CHAPTER 14 Fund Operations 343

The Transfer Agent 343

Fund Accounting 355

Investment Operations 366

Chapter Summary 370

Notes 372

SECTION FOUR Beyond Traditional Funds

CHAPTER 15 Exchange-Traded Funds 377

A Brief History 377

Advantages and Disadvantages 380

Legal Structure 381

Operations 384

Portfolio Holdings 387

The Future of ETFs 393

Chapter Summary 394

Notes 395

CHAPTER 16 Hedge Funds 399

Traditional Hedge Funds 400

Traditional Hedge Fund Investors 415

The New Hedge Funds: Liquid Alternatives 419

Chapter Summary 423

Notes 424

SECTION FIVE The Internationalization of Mutual Funds

CHAPTER 17 Cross-Border Investing 433

The Growth in Cross-Border Investing 433

Advantages and Risks of Investing Overseas 437

Operational Challenges of Investing Overseas 440

Putting It All Together: Managing a Global or International Fund 444

Chapter Summary 448

Notes 449

CHAPTER 18 Cross-Border Asset Gathering 451

The Global Market for Investment Funds 451

Models for a Global Fund Business 459

The UCITS Model 464

Chapter Summary 473

Notes 474


Gathering Fund Assets through Retirement Plans 477

Chile’s Retirement System 480

Singapore’s Retirement System 483

Notes 487

About the Companion Website 489

About the Authors 491

Index 493