31 How are mutual funds structured?
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This article is from the FAQ, by with numerous contributions by others.
31 How are mutual funds structured?
Mutual funds are in their most basic form corporations. Investors
are the shareholders in the company and the assets of the company are
the pooled investments of all the shareholders (investors). The board of
directors of a mutual fund act just as a board of directors for any company.
They are elected representatives of the investors, who owe shareholders
a fiduciary responsibility. The most important function of the board is
to select the fund's manager. The fund manager is in a way, the president
of the company/fund. The manager traditionally makes all the investment
decisions for the fund and supervises the day to day operations.
Managers are paid a management fee which is usually a percentage of
the assets under management. Managers may also have incentive clauses
in their contracts that reward superior performance. Because the manager
is paid a percentage of the assets s/he is responsible for, there is an incentive
to do well for investors in the hopes of attracting more investors and in
turn, more money to manage.
Typically, open ended funds retain the services of a underwriter to distribute
shares. The underwriter is a NASD licensed broker/dealer. This starts to get
a little complicated, but generally it works like this;
ABC Growth Fund's board of directors hires ABC Management to run the fund.
ABC Growth Fund's board also hires ABC Investments to act as the distributor.
ABC Management and ABC Investments are wholly owned by another company
(for this example ABC Inc.). While ABC Management, ABC Investments and
ABC Inc. may not own ABC Growth Fund, they would likely control many of
the seats of the board of directors. For instance, in the Janus Fund's prospectus
it states:
"Janus Investment Fund (the "Fund") is an open-ended management investment
company whose shares are currently offered to the public in eleven series
(individually a "Fund" and collectively "Funds"). Eaxh fyund is managed separately
by Janus Capital Corp. ("Janus Capital") and has its own objective and policies
designed to meet different goals. "
Now overlooking the fact that Janus has decided to aggregate each of the individual
funds into one investment company trust, you can see that Janus Investment Fund
has hired Janus Capital Corp. to manage each of the funds. Additionally, the
prospectus later states that the Janus Service Corp, a wholly owned subsidiary
of Janus Capital, is the subagent for the transfer agent and Janus Distributors Inc.,
another wholly owned subsidiary of Janus Capital, is the underwriter/distributor.
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