MGT 807b Mutual Funds


William N. Goetzmann, Yale School of Management

Joseph Lennon, formerly President, Retail Distribution and Service at Fidelity.

TA: Zoran Ivkovich 2-5559



Course Description


The course will be an in-depth study of the mutual fund industry . The course covers the history, the current players and the future challenges of the industry. It will be a seven week course, with a case each week and lectures and discussions guided by an academic specialist on mutual funds and an accomplished practitioner. Topics include industry evolution, portfolio management, manager management, fund regulation, fund marketing, investor behavior and fund servicing. Students will explore the societal role of mutual funds, the goals and responsibilities of funds and fund companies, competition within the industry, how managers are selected and evaluated, how managers manage, how customers select funds and how hot money affects funds. Students will be expected to write a term paper for a grade. In addition, we ask students to form groups for case preparation and reading each week. Case presentation by two groups a week is expected.


Reading and Resources:

Robert C. Pozen, 1998. The Mutual Fund Business. Cambridge, MA:MIT Press ISBN # 0-262-16177-x (alk. paper). -- ISBN # 0-262-66141-1 (pbk. : alk. paper) This is the textbook for the course and highly recommended.

Site for the Investment Company Insitute. This is the site for the mutual fund industry trade organization and a resource for statistical information about the mutual fund industry as well as current issues.

Statistical analysis of mutual fund data:

Ibbotson Analyzer, SOM network. See Applications on Resolute, w:\ibbotson6\bin60\encorr. This database contains all U.S. open-end mutual fund return data by investment caategory and a platform for statistical analysis.

Ibbotson Attribution software, SOM network.See Applications on Resolute, w:\ibbotson6\bin60\atrib. This program allows you to calculate the risk-adjusted return to mutual funds using either a fixed or a dynamic benchmark. It is recommended for students who have already taken Investment Management.

Morningstar Principia Plus CD-ROM database of American mutual funds. A rich source of information about the mutual fund universe, including fund-specific information, fund fees, composition, historical performance and much more. Avaliable at the social science library.

Current academic research papers on Finance are searchable at the Financial Economics Network Non SOM students must register to obtain use of SOM computer resources.


Course Outline



Week 1 Overview of Mutual Funds and Industry Evolution


History of the investment industry from inception. European rooots and American experience. The industry through the crash. How and why has the industry grown? What has been the effects of such growth? The mutual fund industry in the modern era. Money market funds vs. banks. Legislation and its effect on fund growth. An introduction to the range of mutual funds and what they do.

Reading: Pozen: Chapters 1 & 2, Bullock, The Story of Investment Companies

PDF file of Goetzmann's slides on the origin and history of mutual funds.

Week 2 Regulation and Marketing


The 1940 act. What is is and how it functions. Pros and cons of regulation. Who are the customers? What do they want? How do they make decisions? Portfolio theory and mutual funds. How should risk and return be measured? Marketing and mutual funds. Consumer choice theory and factors in mutual fund returns. Outside the 1940 act -- hedge funds and their performance. Are unregulated funds attractive? Current regulatory issues.


Reading: Pozen: Chapters 3 & 7, Capon, Fitzsimmons, & Prince: "An Individual Level Analysis of the Mutual Fund Investment Decision", Goetzmann & Peles: "Cognitive Dissonance and Mutual Fund Investors", Odean: "Are Investors Reluctant to Realize their Losses?", Tufano & Sevick: "Board Structure and fee-setting in the U.S. mutual fund industry." Arthur Levitt's proposed rule changes

Text of the 1940 Investment Company Act


Case 1: Analyzing Credit Issues in a Money Market Fund Pozen p. 29. Introduction to money market funds and strategic choice. Supplemental reading for the case: Christofferson & Musto: "Demand Curves and the Pricing of Money Management," Musto, 1997, "Portfolio Disclosures and Year-End Price Shifts," JF 52:4, September.


Week 3 Portfolio Management


The role of mutual funds in the individual investment decision. More on the fund perpspectus. Stock funds, bond funds and hybrid funds. Large vs. small funds. Trading costs and capital gains. Tax considerations. Styles of mutual fund managers. Valuation of securities. Responsibilities of managers. Manager behavior. Manager compensation.


Reading: Pozen: Chapters 4 & 5, Arnott: Due Diligence: "A manager's perspective", Droms: "Fiduciary Responsibilities of Investment Managers and Trustees", Fisher & Statman: "Investment Advice from Mutual Fund Companies", Jeffrey: "Do clients need so many portfolio managers?"

Brown & Goetzmann: "Mutual Fund Styles" Weiss and Kraft, 1998, "Tax Planning by Mutual Funds" Eric Falkenstein, 1996, "Preferences for Stock Characteristics as Revealed by Mutual Fund Portfolio Holdings" JF 51:1

Case 2: BayFunds



Week 4 Manager Management


The basics of performance evaluation. Sharpe and Jensen measures. How do you pick a manager? When do you fire them? What standards are useful for determining skill? Is there differential skill? Do you make manager "portfolio" decisions? Do managers herd and why? What are the constraints of the ICA of 1940?


Reading: Chevalier & Ellison: "Career concerns of mutual fund managers", Goetzmann & Ibbotson: "Do Winners Repeat?", Henriksson: "Market Timing and Mutual Fund Performance: An Empirical Investigation", Jensen: "Problems in Selection of Security Portfolios" Khorana: "Top management turnover: An empirical investigation of mutual fund managers Sharpe: "Mutual Fund Performance"


Case 3: Choosing a Fund. Roseanne's Choice

Week 5 Financial Dynamics, Fund Flows and Mutual Fund Investors


Dynamic portfolio strategies and controlling for manager style. Index funds and the stock market.


Reading: Pozen: Chapters 10 & 11, Brown, Harlow, & Starks: "Of Tournaments and temptations", Russ Wermers, 1998, Herding and the Impact on Stock Prices, Goetzmann and Massa: "Index funds and stock market growth"

Case: Fund Voting in a Proxy Fight, Pozen page 593




Week 6 Globalization

Guest Speaker: Roger Servison, Managing Director, Fidelity.

The mutual fund industry around the world. Challenges of managing global portfolios. Country funds


Reading Pozen, Chapter 13. Brown et al.: "The Japanese Open-End Fund Puzzle"

Cai, Chan, Yamada "The Performance of Japanese Mutual Funds"

No case this week


Week 7 Retirement Planning and Fund Service


Long-term retirement planning. Changes in the equity premium. Service as a major factor in the business. Marketing channels. 401-K market.



Reading: Pozen: Chapters 8 & 9, Coval & Moskowitz: "Home Bias at Home: Local Equity Preference in Domestic Portfolios", Gruber: "Another Puzzle: The Growth in Actively Managed Mutual Funds", Sirri & Tufano: "Costly Search and Mutual Fund Flows", Zheng: "Is Money Smart"

Case: Case: Controlling Hot Money, Pozen page 483 - 506