The Fund Industry

"The result is a timely, comprehensive book for retail investors who want to know how their funds work (or don't), for financial planners, and for students who aspire to join the fund industry." ValueWalk

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 Investors 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 Appendix to Chapter 7 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