What Is The Difference Between Different Features of Investment Companies?

What follows is a transcript of the video recording.

Let’s Try a Practice Question:

Regarding the price of closed-end funds held by investors, which of the following statements are TRUE?

A. The price is set by formula each business day

B. Closed-end funds can be sold at a discount or premium to their net asset value.

C. Shares are sold at the price calculated at the close of that day

D. Shares can only sell at a premium to their Net Asset Value.

The answer here is: B

Supply and demand play a crucial part in how these types of shares can be sold at a discount or premium to their net asset value. Supply and demand also play a part when working to own closed-end fund shares and the reason the shares can be traded at a discount or a premium.

Investment Companies Comparison

Chapter 4 on the SIE is key. The information is testable, and you may be asked about several types of investment companies. These companies, all their little nuances and bits and pieces, are critical. If you can fill in the correct chart, you will be on track to getting the correct answer.

Having the correct grid means you will have a decent grasp as to how these things work, and how the dynamic plays in terms of their share price. When finding that “closed-end funds” is the correct answer to the question above, you may also wonder where it goes on a grid? The first question to ask: Are closed-end funds actively managed? The answer is yes, closed-end funds are actively managed, because of the market demand. They change on exchanges, they fall into this lower portion and, closed-end funds are exchange traded, therefore, actively managed.

What Role Do Portfolio Managers Play?

With close ended funds, you will have a portfolio manager, working every day. During the day to day, he or she might sign in, pull up the Wall Street Journal, look at all the different movements in the SMP, the Dow Jones, look at his or her own portfolio, trade actively in and out. He or she will actively be running around and trading all the things in their portfolio. Investment companies that are actively managed will be a mutual fund, also an open-ended fund. These are the ones that do not have any secondary market, they are redeemable directly with the fund, and actively managed.

What Does Passively Managed Mean?

Something that is passively managed is supervised, but it is redeemable directly with the fund. It is going to be the UIT.

What Is an Exchange-Traded Investment Company That Is Passively Managed?

That is an ETF. Also keep in mind if you are a portfolio manager for an ETF, you have a nice gig. You come into work, you are passively managing your portfolio there, you are tracking that index.

An Average Day in the Life of a Portfolio Manager:

1. Come to work
2. Log on
3. Read the news
4. Watch some sports
5. Go out for lunch
6. Meet with some clients
7. Go to the gym
8. Go to your computer at 5 PM
9. Check how your portfolio’s doing
10. Sign off and go home!

If you want to manage a portfolio, consider managing an ETF. ETFs are exchange traded funds. They typically track a benchmark or an index. Which of the two following products above could trade at a price above or below their net asset value? We know that the other one is a closed-end fund, so what is the second one? This one is an ETF because it is exchange traded, and if it is traded on an exchange, at that point, the price of that security or that index or that investment company is going to be dictated by the forces of market supply and demand. We have this idea of net asset value.

What Is Forward Pricing?

We talk about the shares that can be sold at a discount or premium to their net asset value.

Which one calculates the net asset value on a forward pricing basis? That would be forward pricing.

This is a term that is popular on the SIE exam. It means that it is going to be filled at the next calculated net asset value.

When to Buy Mutual Funds?

When buying a mutual fund, you are going to buy at the next calculated net asset value, plus the sales charge. The net asset value is always going to be calculated at the end of day, 4:00 PM, or whenever the market closes. Therefore, any orders placed intraday, before 4:00 PM, are all going to get executed at that next calculated price. If I place an order at 10 AM, 1:00 PM or 3:50 PM, it is going to get priced in at the next calculated net asset value. If someone places an order past 4:00 PM, they are not going to get that calculated net asset value, they will have to wait for the next day. If someone places an order at 5:00 PM, the mutual fund has already calculated its net asset value at 4:00 PM, therefore they will have to wait a whole workday to get priced in at the next calculated value.

What Is POP?

The POP (public offering price) is the term that is used to describe the price that an investor pays when they buy shares in a mutual fund. The buyer is always going to pay the net asset value and they will always charge you with sales charge. Mutual funds, net asset value, think forward pricing, forward pricing, will price it at the net asset value and tack on a sales charge for a POP.