Mutual Funds

Contents

AIM OF THE COURSE

When investors give their money to someone else to manage, most often they do so through mutual funds. Studying the mutual fund business, therefore, is central to understanding investment management as a whole. Further, given the enormous size of the mutual fund industry around the world, there are important implications for other areas of finance, from asset pricing to corporate governance. In this course, we will survey up-to-date evidence on key issues surrounding mutual funds. While much of this evidence is US-based, we will be taking an international perspective as much as possible. The aim is to gain an in-depth understanding of the state of the mutual fund industry, as well as a set of tools to develop this understanding further.
MAIN ISSUES

Michael wants to save money for the future. He knows about stocks and bonds, has an intuitive appreciation of diversification, and feels it is time for him to have an investment portfolio. He hasn’t, however, either the time or the resources to build up and manage a portfolio of direct holdings of financial securities all on his own. Michael, of course, is far from being unique in this predicament. Unsurprisingly, there has sprung up a type of financial institution that meets Michael’s needs. It simply offers Michael the opportunity to acquire shares in a portfolio of assets that it manages, in exchange for a management fee. We use the term “mutual fund” as a generic name for such an institution, whatever else it may be called around the world – unit trust, SICAV, investeringsforening, and so on.
Although Michael needs the service provided by a mutual fund, like any consumer he has a number of worries. How do I know the fund will do a good job? How do I know they will not overcharge for it? How do I know someone else will not do a better job? And what does “a good job” even mean? At the same time, the fund management company, even as it tries to achieve its investment objectives, also worries about Michael. What is it that he really wants? How naïve or sophisticated is he? What does it take to attract him to our fund, and to make him stay? How would he react if we offer him additional funds? Seeking to answer naturally arising questions such as these takes on a path towards understanding one of the most important types of financial intermediary around the world. Specifically, we will address the following issues:
• What are mutual funds? How do they work? What are the similarities and differences among mutual fund sectors around world? What regulations are mutual funds subject to? How are mutual funds different from other types of managed investments?
• How to measure fund performance? What common factors in returns to control for? What influences fund performance?
• What role do passive funds play? What are the differences between exchange-traded funds versus traditional passive funds versus enhanced passive funds?
• How do investors in mutual funds behave? What is the influence of investment performance, rating agencies, advertising, advisors/brokers on their behavior?
• What issues do fund managers face? What are their incentives, and how do they respond to these incentives?
• How are fund management companies governed? How do they decide on opening and closing funds, advertising them, hiring and firing managers?
• What is the most influential research on mutual funds? What methodologies and datasets have been used? How to conduct research in this area? What are the main pitfalls?
• How do mutual funds impact other areas, such as asset pricing and corporate governance?
TEACHING METHODOLOGY

The course will consist of lectures, discussions, case studies, and student presentations.
LEARNING OUTCOME

• Understand the state of the mutual fund industry and the challenges it faces
• Gain insight into the decision-making of fund investors, fund managers, and management companies
• Develop familiarity with the academic literature on mutual funds and main areas of current research
• Acquire tools to analyze individual funds and to answer specific questions about the industry
• Become aware of mutual funds’ influence on other areas of finance.
EVALUATION OF LEARNING OUTCOME: ASSESSMENT CRITERIA

By the end of the course students must be able to fulfill the above stated learning outcome.
Grade 12:
Grade 12 denote 100% target fulfillment related to the learning outcome.
Grade 02:
Grade 02 is the minimum grade required for passing and is therefore given for the minimum acceptable performance related to the learning outcome.
LITERATURE

Haslem, John A., editor (2010), Mutual Funds: Portfolio Structures, Analysis, Management, and Stewardship, Hoboken, NJ: John Wiley and Sons.
The book will be supplemented with up-to-date academic and practitioner literature.