Workshop 8

• Investment funds


  Also commonly referred to as collective investment funds or collective investment schemes
• Investment funds


  • Created by investment managers in which their clients can choose to invest
  • Each fund includes a collection of investors
  • Also referred to as 'asset management' or 'fund management'
• Clients


  Want to invest money to meet particular objectives
• Investment managers


  Select the most appropriate investments (mainly shares, bonds and money market instruments) for their clients based on the objective of an individual fund
• Funds


  Pool the money together of many investors
• Benefits of collective investment

  • Economies of scale
  • Diversification
  • Professional investment management
  • Regulatory oversight
  • Tax deferral
• Economies of scale


  Larger orders attract more competitive dealing fees and commissions, and more attention from brokers and investment bankers - investment information can be more timely and comprehensive
• Diversification


  A diversified portfolio contains a substantial number of investments and will be less risky than a portfolio with just one or two investments in it
• Professional investment management


  Gives investors access to professional investment management and geographical areas or asset classes with which they may be unfamiliar
• Regulatory oversight


  Many funds are carefully vetted by financial services regulators before they can be marketed to potential investors
• Tax deferral


  Investing in funds can be tax efficient. Many funds do not pay any tax on the income and gains they generate, and the investor only pays tax when she sells the investment
• Investment styles


  Each fund will be managed according to the style adopted by the Fund Manager to meet the objectives of the fund. 'Style' refers to the approach taken to choosing the investments for the fund
• Investment objectives


  Each fund will have its own set of objectives and it will be made clear the types of financial assets they will invest in
• Active management


  • Aims to out-perform a predetermined benchmark over a specific time period
  • Fund Manager uses fundamental and technical analysis
  • Top-down approach focuses on economic and industry trends
  • Bottom-up approach analyses a company's financial statements, strategy and management
• Active management styles


  • Growth investing
  • Value investing
  • Momentum investing
  • Contrarian investing
• Passive management


  • Aim to perform in line with or 'track' the benchmark index
  • Often described as Index-tracker funds or Indexation
  • Buys the index constituents which means that the performance of the portfolio is designed to 'track' the up-and-down movements of the index
  • Lower dealing costs and lower turnover of assets
  • Performance is impacted by the need to rebalance the portfolio to replicate changes in the index constituent weightings and to adjust for stocks being promoted into – and being relegated from – the index
• Core-satellite management


  • 'Core' is the name given to around 70-80% of the fund's portfolio which is invested in index tracking funds to minimise risk of underperformance
  • 'Satellite' is the name given to the remainder of the portfolio which is invested in specialist actively managed funds or individual securities
• There are almost 2,500 UK domiciled authorised investment funds available to investors
• Investment Association (IA) classification system

  Classifies investment funds between over 30 sectors, with funds categorised as providing 'Income' or 'growth' or 'Specialised' funds if they fall outside the previous two
• Each of the IA sectors contains funds investing in similar asset categories in the same stock market or same geographical area
• Bond funds


  Differ in the content of each fund within the IA sectors
• Collective investment scheme fund structures

  • Investment company is a business that specializes in pooling funds from individual investors and making investments
  • Open-end fund is an investment company that stands ready to buy and sell shares in itself to investors, at any time
  • Closed-end fund is an investment company with a fixed number of shares that are bought and sold by investors, only in the open market

  
• Unit trusts (open-ended funds)

  • A collective investment scheme which can take different forms, but have the same basic structure
  • In the UK this investment scheme often takes the form of a trust, which is a particular type of entity that is often used to hold assets such as investments on behalf of another person, or group of persons
• Unit trusts


  • Investors pay money into the trust in exchange for units
  • Investors can buy into the fund and sell their units back to the fund
  • The portfolio might increase or decrease in value, affecting the value of the units
• Trustees


  • The legal owner of the assets in the trust, holding the assets for the benefit of the underlying unit holders
  • Have an important policing role, ensuring that the manager complies with the terms of the legal document that created the trust, the 'trust deed'
• Unit trust pricing


  • Traditionally dual-priced, with a higher offer price at which investors can buy units and a lower bid price at which they can sell their units back to the manager
  • The difference between the two prices is known as the spread
• Net Asset Value (NAV)


  The value of the fund's underlying investments, which the prices at which units are bought and sold are based on
• Unit trust dealing


  • Investors can buy or sell units directly with the fund manager, via their broker or financial adviser, or through a fund supermarket
  • Settlement takes place directly with each fund group
• Open-ended funds around the world

  • UK: Unit Trusts
  • US: Mutual Funds
  • Europe: Open-Ended Investment Companies (OEICs), Unit Trusts, Societe d'Investment a Capital (SICAV)
• Closed-ended funds (investment trusts)

  • Fund Manager creates a separate investment company with the objective of investing into securities
  • This company is typically listed on the Stock Market
  • Investors buy into the investment fund via the stock exchange
  • The price is determined by the demand/supply on shares, which can result in the fund price trading at a premium or discount to the underlying NAV
• Investment trusts


  • Set up as a listed company, not a trust
  • Have a fixed number of shares issued that remain fixed for many years (closed-ended)
  • Have a board of directors that uphold the best interest of the investors and meet regularly
  • Shareholders can vote to remove members from the board of directors
  • The investment manager is in charge of the day-to-day running and decides where to invest the money
• Gearing


  The process of investment trusts borrowing money on a long-term basis, which can improve returns when markets are rising but exacerbate losses when markets are falling
• Pricing, discounts and premiums


  • The price of investment trust shares is not based on the net asset value of the underlying investments, unlike OEICs
  • Shares can trade at a premium (above NAV) or a discount (below NAV) depending on factors like market sentiment, past performance, and beliefs about the true value of the company
• Real Estate Investment Trusts (REITs)


  Investment vehicles that allow investors to buy shares in a portfolio of commercial real estate properties, with an investment manager making the investment decisions
• Premium


  When shares in investment trusts trade above the NAV
• Discount


  When shares in investment trusts trade below the NAV
• Reasons for investment trust shares trading at a premium or discount to NAV


  • If an investment trust is close to winding-up or is subject to a takeover bid
  • Market sentiment towards a particular type of investment or market the company invests in
  • Past performance under a particular manager or board
  • The market's belief that the NAV of the company is not reflecting a fair value or in some cases this may be due to the market not understanding the true value of the company
• Share prices are determined by what somebody is willing to pay for them in exactly the same way as ordinary shares in a company are priced
• Real Estate Investment Trusts (REITs)


  Investors buy shares in the REIT via a stock exchange. An investment manager uses the investors' money to make decisions on investing in commercial and possibly residential property. Money is generated via the rental and disposal (sale) of the property held in the REIT. Gains are paid to shareholders.
• Advantages of indirect investment in property (via REITs) over direct investment in property

  • Diversify the risk of holding direct investments in property
  • Removes the liquidity risk associated with direct investment in property
  • Enables investment in commercial property with relatively small sums of money
  • Gains access to professional property investment
  • Avoids double taxation