Investment companies and investment mechanism in the USA

In 1980, the management of investment companies in the United States was $ 60 billion for 7 million investment accounts. In 1994, the total amount of investment in investment companies exceeded $ 2 trillion, and the number of investor accounts reached 80 million. According to rough estimates, about 33% of American families own these accounts.

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Investment companies

In the US, there are several types of investment companies, among which the so-called management companies are most common. These companies are joint-stock companies, to invest in which you can buy their shares. Shareholder receives income in the form of dividends and interest on them, as well as due to the increase in the value of the shares themselves. Management companies are divided into open investment companies, or mutual funds, and closed investment companies, or closed trusts. In Russia, the analogue of the former are mutual investment funds, while the analogue of the latter is equity investment funds, including the CHIFs. The activity of American investment companies is regulated by the Investment Companies Act 1940. It provides for a minimum asset size for both types of investment companies of $ 100,000.

Open companies (mutual funds) have the right to issue only ordinary shares, the income on which for the investor cannot be determined in advance. It depends on the success of the fund’s capital management. Public investment companies pledge to repurchase issued shares from their shareholders upon request. Thus, these shares can only be bought from the company and sold to it. The value of a share in an open fund is determined on the basis of the net asset value per share.

Reference. By net assets is meant the entire capital of the fund minus its expenses that have already been incurred or should occur in the near future. The net asset value per share is determined by dividing the fund’s net assets by the number of shares issued. The net worth of mutual fund assets is calculated at least once a day. The Wall Street Journal publishes data on the net asset value per share of mutual funds for the previous day.

Mutual funds are most common in the US, since it is always possible to sell its shares to the fund; in the long run, they have shown higher returns than on bank deposits, in addition, information about their activities is completely open to investors. Below, after a general review of investment companies, we will separately consider mutual funds.

Closed companies (closed trusts) are not obliged to repurchase their shares from shareholders. They can be sold on the stock exchange and over-the-counter stock market. Therefore, the price of these shares is not calculated by the company, and is set depending on supply and demand in the market. A closed company has the right to issue, in addition to ordinary shares, bonds and preferred shares, the percentage of which is fixed for the investor. For an investor, this is good if the company did not work very well and on average the dividends are small. Then the owner of the preferred share wins compared to other shareholders. If the fund’s profit, on the contrary, is high and dividends are paid large, this will not affect the income of the owner of the preferred share: he will receive exactly as much as fixed in advance. Besides,

Closed companies have a long history in the United States. During the “great American depression” many investors suffered huge losses. As a result, the concept of closed trusts has been consigned to oblivion for many years. The popularity of closed companies increased again in the 80s. In 1980, the market was booming and brought huge profits to closed companies. The number of closed investment companies includes the majority of “country funds” – investment companies that invest money in the securities of a single country. In terms of profitability, emerging markets are particularly interesting for Americans. As you know, in developed countries to invest money more securely than in developing ones, but one should not expect high incomes in a stable economy. In countries that are just starting to raise their industry, the prospects are much brighter, although they are accompanied by an increased risk. By the way, Russia today refers specifically to emerging markets. The fact that closed trusts are usually dealt with such countries is not surprising. To redeem the shares of its shareholders, the open fund has to sell part of its assets, but if these assets constitute the securities of a country with an unstable economy, then this can be a serious difficulty. Therefore, the company prefers not to make such a serious obligation as the repurchase of its shares. Of course, in emerging markets, as a rule, there are sectors with reliable and liquid securities. For example, in Russia it is a government securities market. Therefore, for mutual funds in any country there is also space. From late 1985 to December 1993 the number of closed companies investing in foreign securities increased from 8 to 91, and the value of their assets increased from $ 1.1 billion to $ 24.9 billion. However, open companies still developed more dynamically. Over the same period, the number of mutual funds with foreign investments increased from 42 to 418, with their assets increasing from $ 9.2 billion to $ 151 billion.

Management companies, both open and closed, can be diversified and non-diversified.

To improve the reliability of an investment fund, its money is invested in the securities of many enterprises. This is called diversification. Diversification increases the reliability of the management company (fund), because if a company goes bankrupt, losses are compensated by income from other companies. However, it is no longer necessary to rely on the fund for super-profit in diversification, since if any one enterprise brought a very high income, then its share in the total amount of income for all enterprises is small.

To have the status of a diversified company, 75% of the company’s assets (assets) must be invested in such a way that the share of each company accounts for no more than 5% of the company’s assets and that the company does not own more than 10% of the company’s voting shares. Non-diversified companies do not have such severe restrictions, so investing in these companies is more risky, but potentially they can bring higher returns.

In addition to these two types of investment companies in the United States, there are also so-called unit trusts – peculiar funds, the structure of investments of which is rigidly fixed at the time of creation and does not change. They allow citizens with small savings, together, to acquire large packages of securities. This allows you to buy paper cheaper and save on costs of storing and processing transactions. Savings are also achieved due to the absence of a manager’s remuneration. In 1993, there were approximately 15,000 unit trusts in the United States with assets of $ 107 billion.

Mutual funds

Of all the types of investment companies, mutual funds are the most popular. In 1993, the total number of mutual funds was 4,558, and their assets reached $ 2011 billion; closed investment companies were 512, and their assets amounted to $ 124 billion.

They are similar to our mutual funds in that they themselves buy back their shares and in that the value of a share is determined on the basis of net assets. However, they are fundamentally different from Russian mutual funds, since they are joint-stock companies. Shareholders have the right to vote on issues related to the choice of the board of directors, the approval of investment policies and the approval of the contract with the manager. According to the 1940 law, the board of directors should include at least 40% of directors who are not managers of the company (external directors).

The direct management of the fund rests with the manager – a legal or natural person who receives remuneration for the performance of his services, the amount of which usually depends on the net asset value of the fund. Usually the founder is the founder. The remuneration of the manager should be specified in the prospectus and amounts to 0.25 – 3% of net assets (usually 0.5-1%). The remuneration of the manager is the main part of the fund’s expenses. Relations with the manager are based on a contract that is subject to annual approval by the board of directors and the general meeting of shareholders.

The manager can manage several funds – in this case they talk about a “family” or a group of funds. In the tables in the Wall Street Journal, all funds are listed by management company names in alphabetical order: “Dean Witter” – 15 funds, “Merrill Lynch” – 30 funds, etc. At the end of 1993, 67% of assets mutual funds were managed by only 25 companies. In order to attract as much capital as possible, one management company tries to create funds of all possible preferences. The choice of an investor depends on his preference for varying degrees of profitability, reliability and liquidity. The higher the yield, the lower the reliability. Different preferences correspond to different types of securities. Therefore, mutual funds are divided depending on the type of securities in which they invest. For example, stocks of funds that invest in money market instruments (government bonds, currency, etc.) are highly reliable but not very profitable. Risky, but highly profitable – stocks of funds investing in the securities of young growing enterprises.

Very much in the success of the fund depends on the manager. The most effective managers in the United States and in the world are John Templeton and George Soros. The latter are managed by funds whose total assets in 1994 reached $ 11 billion; for 1990 – 1994 The average annual rate of return was 40%.

As a rule, the activity of the manager is assessed by comparing the dynamics of the assets of the fund with any stock index, for example, Standard & Purs 500. The index is, roughly speaking, the valuation of the stock market, which is calculated on the basis of the value of the most popular stocks traded in this market. If their value increases, so does the index. If it falls, then the index also decreases. As practice shows, it is very difficult to outplay the market in the long term, therefore, at present, most managers use the passive investment tactic (investment by index). In other words, the fund’s assets are invested precisely in those securities that are used to calculate the index. When adding or disappearing any shares from the index, the fund portfolio is adjusted. This method significantly reduces the cost of portfolio management. As a result, the popularity of index-index funds increased significantly.

Mutual funds turned out to be a very flexible institution in the stock market, allowing to satisfy the most varied tastes and demands. Therefore, apparently, they are becoming increasingly popular.

Author: Evan

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