Preface

Mutual funds play an integral role in daily life. In 2009, more than 87 million Americans invested their money through mutual funds, using them as vehicles to save for such important life goals as the purchase of a home, a child’s college education or a comfortable retirement.1 Many businesses rely on money market mutual funds for help in managing their cash balances. And mutual funds are an increasingly popular savings vehicle in Europe, Asia, and other regions of the world.

In the United States alone, more than 157,000 individuals worked directly for fund management companies—among them call center representatives and credit analysts, wholesalers, and portfolio managers. Firms providing critical support to funds—including audit, custody, legal, and technology services—employed hundreds of thousands more. Yet these jobs in the United States represent only a fraction of worldwide employment in the fund industry.

It’s a highly complex industry, offering more than 7,600 funds with different investment objectives and approaches to consumers through multiple distribution channels—through intermediaries, direct sales, and retirement plans. It’s governed by detailed laws and regulations that are continually evolving.

The Fund Industry explains how this industry works in practice. We examine how mutual funds are structured and discuss the key laws and regulations governing their operations. We go behind the scenes at fund management companies to explain how they select investments for fund portfolios, sell fund shares around the globe, and provide service to fund shareholders.

We wrote this book for anyone who’s unfamiliar with the mutual fund industry but would like to know more. All we ask is that readers understand key economic and tax terms such as interest rates and capital gains; knowledge of basic investment concepts—such as the difference between stocks and bonds—is helpful, but not required. We explain the jargon and try to assemble the various components of the fund industry into a coherent whole. Callout boxes highlight key definitions and recent controversy or give you a feel for what it’s like to work for a fund management company.

This book doesn’t just update the second edition of Bob Pozen’s The Mutual Fund Business—it adds much new material to address the tremendous changes in the industry in the eight years since that book was published. Among the enhancements are:

Despite these additions, this book has fewer pages than its predecessor because we’ve established a companion web site for the book at www.wiley.com/go/fundindustry. Rather than including supplementary materials in an appendix to each chapter, we’ve posted them online; you’ll see references to these materials throughout the text. There’s a special section of this web site for teachers; it contains review and discussion questions and suggestions for readings and case studies.

One area that we wished we could have covered in greater detail was derivatives, but space was simply too short to do justice to this complex topic. Instead, we’ve just made brief mention of their impact on mutual funds, especially during the credit crisis of 2008. The web site provides a list of reference materials if you’d like some background reading. Another omission: a glossary—in this case without regrets—since it’s now so easy to look up definitions online. One of our favorite sources for basic financial information is Investopedia.

This book is divided into five sections:

1. Section I: An Investor’s Guide to Mutual Funds looks at funds from an investor’s perspective. We review the advantages and disadvantages of mutual funds, explain how they operate, and discuss how investors can gather information about potential fund investments. We also explore the different categories of mutual funds and review how investors might choose funds within each.

2. Section II: Mutual Fund Portfolio Management examines how funds manage their investments. We discuss portfolio management in stock, bond, and money market funds and then examine how funds implement investment decisions through trading. We conclude with an overview of how mutual funds exercise their responsibilities as substantial stock investors.

3. Section III: Selling Investment Funds reviews how mutual funds are distributed to investors in the United States. We discuss sales through intermediaries, directly by funds and through retirement plans, examining issues within each channel as well as those affecting all channels. The final chapter in this section reviews the inner workings of two other investment vehicles that have become increasingly important: exchange-traded funds and hedge funds.

4. Section IV: Operations and Finance explains how the fund industry provides customer service and keeps portfolio records. We also review the financial dynamics of mutual fund management companies, examining factors that drive their profitability, and trends in mergers and acquisitions.

5. Section V: The Internationalization of Mutual Funds looks at cross-border investing and asset gathering. We take a look at the investment and operational issues faced by U.S. mutual funds investing outside the United States. We examine the special challenges involved in distributing funds across the world and discuss how the European Union has increased cross-border distribution. We end with a survey of the asset management industry in Asia and in the Americas outside of the United States, with a focus on China and Chile.

Supplementary materials mentioned throughout the text—plus a guide for teachers—are available online at www.wiley.com/go/fundindustry.