Investment funds

• Direct investment


  When an individual personally buys shares in a company, such as buying shares in Apple, the technology giant
• Indirect investment


  When an individual buys a stake in an investment fund, such as a mutual fund that invests in the shares of a range of different types of companies, perhaps including Apple
• Collective Investment Scheme (CISs)


  Also known as Collective Investment Vehicles, Mutual Funds, Unit Trusts, Open-Ended Investment Companies (OEICs) or Open-Ended Funds and Close-Ended Funds
• Open-ended funds


  • Do not have a fixed number of shares, the fund company continuously issues and redeems shares based on investor demand
  • Investors can typically buy and sell shares directly from the fund company or through a broker at the fund's net asset value (NAV), which is calculated at the end of each trading day
  • The fund manager has the flexibility to adjust the fund's portfolio holdings in response to market conditions and investor redemptions or purchases
• Close-ended funds


  • Do not continuously issue or redeem shares based on investor demand, investors buy and sell shares from other investors on the secondary market
  • The number of shares is fixed, the market price of a closed-ended fund's shares may not always reflect the fund's net asset value (NAV), shares can trade at a premium or discount to NAV depending on supply and demand dynamics
  • Often invest in less liquid assets or specialized sectors, and their structure allows for a more long-term investment strategy without concerns about large-scale redemptions impacting the fund's liquidity
• UCITS


  Undertakings For Collective Investment In Transferable Securities Funds, fund established in Europe and marketed internationally, complies with the rules of EU UCITS Directives, seen as a measure of quality that makes them acceptable for sale in many countries in the Middle East and Asia, the main European centre for establishing funds that are to be marketed internationally is Luxembourg, where investment funds are often structured as an OEIC known as a Societe d'lnvestissement a Capital Variable (SICAV)
• Several countries, including the UK, Ireland, and Jersey, are popular centers for the establishment of investment funds with a global market focus, these funds are typically structured as either Open-Ended Investment Companies (OEICs) or unit trusts
• Bahrain stands out for having a diverse array of funds available in the Gulf region, totaling over 1,700 registered funds, these funds are a mix of local and international offerings, including those from renowned global fund managers like BlackRock, Fidelity, and JPMorgan
• SICAVs


  Investment companies with variable capital, open-ended collective investment schemes commonly used in Europe and other jurisdictions, have a variable capital structure, meaning they can issue an unlimited number of shares based on investor demand, investors can buy and sell shares of a SICAV at the fund's net asset value (NAV) per share, which is calculated regularly
• ICVCs


  Investment Companies with Variable Capital, similar to SICAVs in structure and function, open-ended investment companies with a variable capital structure, issue and redeem shares based on investor demand, allowing for flexibility in managing the fund's capital, investors can buy and sell shares at the fund's NAV per share
• The Benefits of Collective Investment

  • Economies Of Scale
  • Diversification
  • Access To Professional Investment Management
  • Access To Geographical Markets, Asset Classes Or Investment Strategies Which Might Otherwise Be Inaccessible To The Individual Investor
  • In Some Cases, The Benefit Of Regulatory Oversight, And In Some Cases, Tax Deferral
• Passive management


  Involves constructing portfolios to mimic the performance of recognized indices, assumes market efficiency, making attempts to consistently outperform the market is unnecessary

  
• Advantages of Indexation


  • Few active managers consistently outperform
  • Lower operational costs
• Disadvantages of Indexation


  • Tracking errors due to managing cash flows and rebalancing
  • Dividend reinvestment timing discrepancies
  • May not meet all investor objectives, especially in bear markets
• Active management


  Aims to outperform a benchmark using fundamental and technical analysis, involves forecasting future events, economic or company-specific, to determine portfolio holdings and timing of securities transactions, can be 'top-down' (focusing on economic and industry trends) or 'bottom-up' (prioritizing company-specific analysis)

  
• Investment Styles in Bottom-Up Approach

  • Growth investing (identifying companies with long-term growth opportunities)
  • Value investing (selecting undervalued companies)
  • Momentum investing (choosing shares with rising prices)
  • Contrarian investing (selecting out-of-favor shares with hidden value)
• Core-satellite management


  Involves indexing a significant portion of the portfolio (core) and fine-tuning it by investing the remainder in actively managed funds or individual securities (satellite)
• Smart beta funds


  Combine elements of traditional passive and active investing to outperform traditional passive strategies
• Fund classification


  Grouping funds with similar objectives for investor clarity and comparison, broadly categorized into those designed for 'income' or 'growth', other categories include capital protection, specialist funds, volatility-managed, absolute/target return, or unclassified
• Open-ended funds


  • Investment funds that issue and redeem shares at any time, with investors having a pro rata share of the underlying portfolio, can expand or contract based on investor demand
• US Open-Ended Funds


  The most common type is the mutual fund, legally known as an 'open-end company', investors buy shares directly from the fund at the net asset value (NAV) plus charges, managed by registered investment advisers, investors can transact through brokers, banks, etc., SEC rules require disclosure of fees and operating expenses, tax treatment varies
• European Open-Ended Funds


  Three main types are SICAVs, unit trusts, and OEICs, often structured as UCITS funds, UCITS allows cross-border sales within the EU, Luxembourg is a significant center for European funds, SICAVs are open-ended, single-priced, and often structured as umbrella funds, unit trusts are based on a trust structure and are dual-priced, OEICs, also known as VCCs in Ireland, operate with an authorized corporate director and a depository, can be single- or dual-priced, "Umbrella Funds" are a type of investment fund that encompasses multiple sub-funds or portfolios under a single overarching structure
• Tax treatment


  Some funds are tax-exempt, while others incur taxes on dividends and gains
• European Open-Ended Funds


  • SICAVs
  • Unit trusts
  • OEICs
• UCITS


  Allows cross-border sales within the EU, considered a quality brand in various jurisdictions
• Luxembourg is a significant center for European funds
• SICAVs


  • Open-ended, single-priced, often structured as umbrella funds
• Unit trusts


  • Based on a trust structure, dual-priced
• OEICs


  • Operate with an authorized corporate director and a depository, can be single- or dual-priced
• Umbrella Funds


  Investment fund that encompasses multiple sub-funds or portfolios under a single overarching structure
• Each sub-fund within the umbrella fund can have its own investment objective, asset allocation, and portfolio composition
• SICAVs


  • Open-ended investment companies often managed from Luxembourg and are single-priced
• FCPs


  • Similar to unit trusts, lack legal personality and are administered by a management company
• Unit trusts


  • Investment funds established as trusts, with the trustee as the legal owner of assets, dual-priced
• OEICs


  • Investment funds structured as companies, operating with an authorized corporate director and a depository, can be single- or dual-priced
• Closed-ended investment companies


  Issue a fixed number of shares to the public, traded on stock markets, capital does not fluctuate with investor demand
• Closed-ended funds in the US

  • One of three basic types of investment companies, can invest in more illiquid securities than mutual funds
• Closed-ended funds in Europe

  • Often known as investment trusts or companies, can borrow money and may have a fixed winding-up date
• Share classes of investment trust companies

  May include ordinary, preference, or zero dividend preference shares
• Zero dividend preference (ZDP) shares


  Receive no dividends, returns come from the difference between purchase and repayment amount, issued at Discount Redeemed at Par