The Fund Industry

ROBERT POZEN is Chairman Emeritus of MFS Investment Management(r), as well as a Senior Lecturer at the Harvard Business School and a Senior Fellow at the Brookings Institute. He was previously vice chairman of Fidelity Investments; chairman of the SEC Advisory Committee on improving financial reporting; and a member of the Presidential Commission to Strengthen Social Security. A prolific author of editorials in leading newspapers, in 2009 he published the book Too Big to Save?: How to Fix the U.S. Financial System. Pozen graduated summa cum laude from Harvard College and earned a doctor of laws from the Yale Law School where he was an editor of the Yale Law Journal. THERESA HAMACHER, CFA, is President of NICSA, the National Investment Company Service Association, and the former chief investment officer for Pioneer Investment Management USA, where she supervised a team of over fifty investment professionals managing more than $15 billion in global equity and fixed income assets for mutual fund and institutional clients. Previously, she was the chief investment officer for Prudential Mutual Funds. In 1984, she ran the Prudential-Bache (Tax-Managed) Utility Fund, the top-performing mutual fund in the United States. She is coauthor of The Pocket Idiot's Guide to Investing in Stocks. Hamacher is a summa cum laude graduate of Yale College and a Chartered Financial Analyst.

Foreword by Don Phillips ix Preface xiii Acknowledgments xvii SECTION ONE An Investor's Guide to Mutual Funds 1 CHAPTER 1 Investing through Mutual Funds 3 Advantages and Disadvantages of Mutual Funds 5 History and Growth 9 Regulators and Industry Associations 18 Chapter Summary 23 CHAPTER 2 How Mutual Funds Work 25 Buying and Selling Fund Shares 26 The Pass-Through Tax Status of Mutual Funds 29 A Virtual Corporation 31 Ethical Standards 39 Alternatives to Mutual Funds 43 Chapter Summary 49 CHAPTER 3 Researching Funds: The User Guides 51 Mutual Funds and Disclosure 51 The Summary Prospectus 56 Beyond the Summary Prospectus 63 Using the User Guides 69 Chapter Summary 71 CHAPTER 4 Comparing Mutual Funds 73 Delineating Your Own Investment Objectives 74 Evaluating Performance 77 The Taxonomy of Mutual Funds 83 Chapter Summary 99 SECTION TWO Mutual Fund Portfolio Management 101 CHAPTER 5 Portfolio Management of Stock Funds 103 Stock Research 104 Putting It All Together: Managing a Stock Fund 117 Chapter Summary 130 CHAPTER 6 Portfolio Management of Bond Funds 133 Bond Fund Holdings 133 Putting It All Together: Managing a Bond Fund 145 Chapter Summary 153 APPENDIX TO CHAPTER 6 Bond Basics 155 Defining Characteristics of Bonds 156 Key Analytical Measures 160 Risks of Bond Investments 164 CHAPTER 7 Portfolio Management of Money Market Funds 169 How-Exactly-the $1.00 NAV Works 170 Money Market Fund Holdings 175 Putting It All Together: Managing a Money Market Fund 181 Money Market Funds and the Financial System 184 Chapter Summary 187 CHAPTER 8 Implementing Portfolio Decisions: Buying and Selling Investments 189 The Importance of Trading 190 The Evolution of the U.S. Stock Markets 191 The Role of the Mutual Fund Trader 201 Trading in Bond Funds 210 Chapter Summary 212 CHAPTER 9 Mutual Funds as Institutional Investors 215 Mutual Funds as Stockholders and the Proxy Voting Process 216 Proxy Voting by Mutual Funds 220 Activism and Mutual Funds 224 Mutual Funds and Social Change 232 Proxy Voting Outside the United States 234 Chapter Summary 236 SECTION THREE Selling Investment Funds 239 CHAPTER 10 Retail Sales 241 What Sells Mutual Funds? 241 The Intermediary Channel 243 The Direct Channel: No-Load Firms and Fund Supermarkets 260 Cross-Channel Trends 264 Chapter Summary 271 CHAPTER 11 Retirement Plans and Mutual Funds 273 The Tax Benefits of Qualified Retirement Plans 274 401(k) Plans 278 Individual Retirement Accounts 293 The Future of Retirement Planning in the United States 298 Chapter Summary 302 CHAPTER 12 The Competition from Exchange-Traded Funds and Hedge Funds 305 Exchange-Traded Funds 305 Hedge Funds 319 Chapter Summary 333 SECTION FOUR Operations and Finance 335 CHAPTER 13 Customer Service 337 The Role of the Transfer Agent 337 Technology and Shareholder Servicing 349 Transfer Agents as an Industry 354 Chapter Summary 361 CHAPTER 14 Portfolio Recordkeeping and Valuation 363 A Day in the Life of the Fund Accountant 364 Valuation of Portfolio Holdings 370 Keeping Track of Portfolio Securities: The Custodian 376 A Critical Link: Investment Operations 379 Behind the Scenes: The Independent Auditor 384 Chapter Summary 388 CHAPTER 15 The Financial Dynamics of the Fund Management Industry 391 Expenses for Fund Investors 392 Management Fee Revenue: The Debate 398 Mergers and Acquisitions Involving Fund Sponsors 408 Chapter Summary 416 SECTION FIVE The Internationalization of Mutual Funds 419 CHAPTER 16 Cross-Border Investing 421 The Growth in Cross-Border Investing 421 Advantages and Risks of Investing Overseas 426 Operational Challenges of Investing Overseas 431 Putting It All Together: Managing a Global or International Fund 435 Chapter Summary 442 CHAPTER 17 Cross-Border Asset Gathering 443 The Global Market for Investment Funds 444 Models for a Global Fund Business 450 The UCITS Model 456 European Pension Pooling 463 Chapter Summary 469 CHAPTER 18 The Market for Investment Funds: Beyond the United States and Europe 471 Asia 472 The Americas ex U.S. 487 Chapter Summary 495 Notes 497 About the Authors 515 Index 517