Open-End Management Company

What Is an Open-End Management Company?

An open-end management company is a type of investment company responsible for the management of open-end funds. Open-end management companies manage both open-end mutual funds and exchange traded funds (ETFs).

How an Open-End Management Company Works

An open-end management company is a type of management investment company as classified by the Investment Company Act of 1940. Investment companies are classified into three basic categories:

1. Face-amount certificate company
2. Unit investment trust
3. Management (investment) company.

All of these investment companies manage assets in investment products. Generally, investment companies must all follow the rules and regulations enacted by the 1940 Act as well as the Securities Act of 1933 and the Securities Exchange Act of 1934.

Open-end management companies are most often associated with the management of open-end mutual funds. However, they also manage ETFs too. Vanguard is one example of an open-end management company.

Open-end funds are open, meaning that they can continually bring on new investors and new investment capital rather than being closed at some point where they no longer bring on new investors or capital. All capital is pooled from the various investors.

Shares are issued as long as investors are willing to buy and are bought and sold at their net asset value (NAV). Open-end funds are an easy way to gain exposure to financial markets in a diversified way with a specific investment objective.

Types of Open-End Management Companies

Mutual Funds

Open-end mutual funds are not traded on exchanges. Therefore, the open-end management company is responsible for distributing and redeeming all of the shares of open-end mutual funds offered in the market. Open-end mutual funds do not have a specific number of shares offered in the market.

These funds are sold and redeemed at their daily net asset value (NAV) per share. Investment company rules and regulations require transactions for open-end mutual funds to take place at their forward NAV. This means buyers and sellers can expect to transact at the next NAV following their transaction request.

Open-end mutual funds pool the money from investors in order to attain operational and management economies of scale. Open-end funds are managed to a broad range of investment objectives. They can deploy various types of strategies. They also manage assets across a wide range of market sectors and segments.

Open-end funds offer numerous share classes for investors. They are structured to include retail investor shares and institutional investor shares. They also often issue special shares for certain types of investments such as retirement funds.

While the transactions of open-end funds are managed by their respective open-end management company and not on any exchange, investors may choose to deal with intermediaries. Fees and open-end management company fee structures are applied when seeking to transact an open-end fund through an intermediary.

Full-service brokers and distributors will charge fees according to the management company’s sales load fee structure which is outlined in the fund’s prospectus. Investors transacting through a discount brokerage will pay lower fees and may face certain investment minimums.

Exchange Traded Funds (ETFs)

ETFs are also offered by open-end management companies, and as characteristics of such funds, do not have a specified number of shares offered in the market. Therefore, the open-end management company can issue and redeem shares at its discretion.

ETFs differ from open-end funds in that they trade actively throughout the day on an exchange like stocks. They do not offer a range of share classes with different fee schedules, but rather, investors buy ETFs through brokers or on brokerage platforms.

ETFs are passively managed funds. Managers of ETFs select a specific benchmark to replicate and purchase the stocks listed in that benchmark, for example, the S&P 500. This allows investors exposure to a large number of shares in the market without having to purchase the individual shares themselves. And because ETFs are passively managed, they typically have low expense ratios.

Open-end funds and ETFs do have many similarities. Both are pooled funds allowing for management and operational economies of scale. Both open-end funds and ETFs offer products managed to a wide range of investment strategies and objectives.

How to Invest in Open-End Funds

There are a variety of ways to invest in open-end funds and the best way to do so is through a broker. A broker will sell shares of a specific fund to investors. If you are purchasing an exchange traded fund, for example, you can sign on to your broker's online portal, choose the ETF you wish to purchase, and buy it like you would a stock.

If an investor is interested in gaining exposure to the S&P 500, for example, they can purchase State Street's SPDR S&P 500 Trust (SPY) or the iShares Core S&P 500 ETF (IVV). Most of the large investment management companies, such as Vanguard, offer over 100 mutual funds with specific investment goals that investors can choose from.

Open-End vs. Closed-End Funds

The primary difference between an open-end fund and a closed-end fund is that open-end funds are open to new investors and new investment capital whereas closed-end funds are closed to new investors and new capital.

Managers of closed-end funds believe the fund has reached a size that is optimal and any size larger would impede the strategy of the firm or have negative consequences to the overall market if the fund was making large buy or sell orders.

Closed-end funds offer a fixed number of shares like publicly-traded companies and release these shares into the market via an initial public offering (IPO). Shares are listed on an exchange and are available to purchase on the secondary market via brokers.

Shares are bought and sold throughout the day and are purchased or sold at the price they are trading at during the day, as opposed to the end-of-day NAV.

Open-end funds, on the other hand, are valued at their NAV (unless they are ETFs) and can constantly release new shares if investor appetite exists. Both types of funds, however, are professionally managed, invest in a variety of equities or asset classes, and pool the investment capital of the investors in order to invest on a larger scale.