The Fund Industry: How Your Money is Managed, 2nd Edition

SECTIONTwo

Mutual Fund Portfolio Management

Shareholders own mutual funds for one main reason: to earn an attractive investment return. That return may come from interest income or dividend income or capital gains or all three combined. Whatever the precise source, investors believe that by putting their money in a fund, they will be able to see their assets grow in value.

This section focuses on how mutual funds generate those investment returns. First some terminology: The investments that a fund purchases are together referred to as its portfolio. The process of choosing those investments is called portfolio management and is overseen by portfolio managers. Analysts research the details of particular investments, while traders implement portfolio managers' decisions by arranging the purchase and sale of individual investments.

This section contains five chapters:

Chapter 6 reviews the management of stock funds. The first half of this chapter discusses different approaches to researching investments, techniques that apply not just to stocks, but to other types of investments as well. The second half focuses on portfolio management. It contrasts the management of index funds with active management, explaining how benchmark indexes play a critical role in both. It also reviews the importance of risk management in portfolio construction and the role of attribution analysis in understanding performance results.

Chapter 7 turns to bond funds. It opens with a review of the types of ...