How will we invest our money?

Project Background
This project gives teams the opportunity to assume the roles of mutual fund managers. During the trading session, teams
will define the investment philosophies and goals that will guide the selection of securities for the mutual fund portfolios
they create.
Each week teams will collect, compile, and report their respective mutual fund portfolio’s performance as if they were
reporting to their investors. Early in the project it is recommended students create a prospectus for their mutual fund. The
prospectus for the mutual fund will include the funds investment objective or philosophy, holdings, performance using total
return, selected stocks, income statements, and balance sheets.
At the end of the trading session, teams will develop their ”annual” report from the accumulated weekly data as an
authentic assessment of their mutual fund portfolio. The mutual fund they have created can also be marketed to the class
through a sales presentation and/or Web site using information from the prospectus and annual report.

Background
According to the Dictionary of Financial Terms, “a mutual fund is a professionally managed investment that pools the
capital of thousands of investors.” Each fund has a professional manger and an investment plan that it follows in building
the portfolio. A prospectus for a mutual fund provides a roadmap of a fund – covering everything from its objectives and
fees to the performance of portfolio holdings and manager. An annual report is a yearly record of a publicly held
company's financial condition. It includes a description of the firm's operations, as well as balance sheet, income
statement, and cash flow statement information. The Securities and Exchange Commission (SEC) rules require that an
annual report be distributed to all shareholders. Mutual funds also issue an annual report like other companies. Investors
use both annual reports and prospectuses to gather information about the health of a company before investing in them.
An introductory lesson about annual reports can be found among the core lessons of The Stock Market Game.
Additional information is available at
Yahoo! Finance – http://finance.yahoo.com
Morningstar – http://www.morningstar.com

Vocabulary:
Mutual Funds: Mutual funds are pools of money that are managed by an investment company.
Portfolio: A collection of investments.2 of 14 © 2006 Foundation for Investor Education. All Rights Reserved.
Annual Report: Yearly record of a publicly held company's financial condition. It includes a description of the firm's
operations, as well as balance sheet, income statement, and cash flow statement information. SEC rules require that it be
distributed to all shareholders.
Prospectus: The prospectus of a mutual fund provides a roadmap of a fund – covering everything from its objective and
fees to its performance and manager.
Securities and Exchange Commission (SEC): A federal agency that regulates the U.S. financial markets. The SEC also
oversees the securities industry and promotes full disclosure in order to protect the investing public against malpractice in
the securities markets.
Philosophy: The philosophy of doing business describes your investment objectives. Investment objectives fit into one of
three basic goals: income, income and growth, or growth. The risk factor is also a component of the investment objective.
Holdings: A list of stocks currently owned by the mutual fund.
Performance: Whether the fund is meeting your investment goal. The most accurate measure of a mutual fund’s past
and current performance is its total return, or its increase in value plus its reinvested distributions.
Income Statement: A financial summary of the revenues and expenses of a company during an accounting period.
Balance Sheet: A financial report showing the status of a company’s assets, liabilities, and owners’ equity on a given
date.
Performance Objectives:
Students will be able to:
• Define and demonstrate comprehension of the following terms: mutual funds, portfolio, annual report, prospectus, SEC,
philosophy, holdings, performance, income statement, balance sheet.
• Collect and organize data to include in the prospectus and/or annual report.
• Summarize data in letter, chart and graph form.
• Calculate performance using total return.
• Evaluate data to determine if investment objectives and philosophy were met.
• Write an explanation of performance and fund strategy.
• Create and explain a prospectus and/or annual report for their mutual fund.
People with similar investing objectives give money to a group of individuals called mutual fund managers who are hired
to invest the funds on behalf of the group. The earnings from the investments are distributed back to the people who
mutually funded it. The more money the mutual fund makes the more the individual investors make.
Each team should research the characteristics of mutual funds and compare and contrast the stock selections of two
funds. Each team should then generate a list of ideas for creating their own mutual fund.

Creating a Prospectus
• Based on the your research about mutual funds and your initial experience in the SMG, what would you want to know
as an investor before you gave money to a mutual fund manager? Would you want to know about the investment
objectives, performance, and/or financial statements?
• How would this information be communicated to potential investors?

To begin your prospectus, you will write a summary on what your team has agreed on as a management philosophy. This
philosophy should consider:
• What is your investment objective? Provide income, some income and growth, or future growth.
• What is your risk factor? Conservative, moderate, or speculative?

After agreeing on a management philosophy, teams need to name their fund. The name should reflects their philosophy.
Teams should list the stocks or types of stock they plan to invest in. Their list should include a description of how their
chosen stocks are performing at present. This could be done on a spreadsheet along with a pie chart, illustrating the
team’s investment strategy. Teams should present this information in a pamphlet intended for potential investors. The
pamphlet might also include the management fees they would charge.
Additional mutual fund resources are available at
Path to Investing - http://www.pathtoinvesting.org
Yahoo! Finance – http://finance.yahoo.com
Morningstar – http://www.morningstar.com

Teams should address the following questions in their team journals:

• How well is your mutual fund portfolio performing? Are you doing better or worse than the Dow? S & P? Other similar
mutual funds? (Maybe you want to include some graphs or charts)
• Is your portfolio following the objectives of your mutual fund? Do you need to make changes? If so, what changes are
you going to make and why?
• Are there current events affecting the performance of your stocks? To what extent should you be considering the impact
of these world and national events in the stock selection for this mutual fund portfolio?

Risk vs. Reward

Teams should also print the Transaction History page of their portfolio and compile a list of the top ten companies in their
Account Holdings in descending order from largest to smallest. They will create a chart and graph of their portfolio
holdings.
Calculating Total Return
• Which funds would have been acceptable if the overall market had increased by 6% over the same time period? Why or
why not?

You will calculate past performance by calculating the total return of your investments

Creating Financial Statements

Once the quote and information page for their company loads, teams should click on income statement and balance sheet
links on the left-hand side of the page.
Each team will chose two of the stocks in their portfolio and create a three-year analysis of the income statement and
balance sheet.
Designing an Annual Report Cover
Review and critique different covers of annual reports. Annual Reports.com is a good resource for this activity:
http://www.annualreports.com.
• What messages do the covers convey about the company? Are they accurate
• What images would portray a conservative/income fund?
• What images would portray an aggressive/growth fund?

Design a cover for your mutual fund. Your design should accurately portray their investment philosophy. Afterwards,
teams should write a summary to their shareholders with their final performance and holdings. Include a summary of why
decisions were made to buy or sell stocks and any changes that would be made to the fund in the future.
Letter to Distraught Investor
Inform your teams that their investors are complaining about the yields on their mutual fund portfolios. Have them prepare
a plan to improve short-term gains so they can produce profits for the next quarter. Teams should also write a letter to
investors sharing the new mutual fund investment strategy
Starting Fresh
Have teams decide what approach they would take if they had a chance to start over with a new portfolio. Students should
include changes in philosophy as well as direct references to key buying decisions for their portfolios.