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Collective investment schemes
Collective investment schemes
Advantages of CIS vs direct investment
Access to larger/more unusual investments
Discount to NAV- assets may be bought more cheaply (ITC only)
Diversification
Divisibility
Economies of scale in the case of larger CSs.
Expected return higher due to the extra volatility associated with gearing and changes to the discount to NAV (ITC only)
Expertise of investment managers
Index-tracking of a quoted investment index is possible
Marketability
Quoted prices making valuation easier
Suitable for small investors
Tax advantages (possibly)
characteristics of ITC/UT
stated investment objective (written into prospectus/ offer for sale document- ITC)
closed-ended/ open-ended
Public company, governed by company law/ Trust, governed by trust law
Often quoted on stock exchange
Can raise both debt and equity capital/ Limited ability to gear
Operated by company directors and investment managers/ Operated by trustees
Directors and investment managers receive fees/ trustees and investment managers receive fees. Trustees ensure UT is managed legally in accordance with the Trust Deed, hold the assets and oversee the calc of the bid and offer prices and admin of UT.
investor buys "shares" in the ITC/ investor buys "units" in the UT
Share price determined by supply and demand
Share price often at discount to NAV per share/ based on NAV per unit
Disadvantages of CIS vs direct investment
Loss of control
Lack of diversification away from equities
Additional layer of charges: management fees for investment managers
Need to hold some cash for liquidity which reduces expected exposure/ return (UT only)
Extra volatility caused by gearing/discount to NAV changing (ITC only)
Tax disadvantages (possibly)
Purpose
investor perspective
diversification and lower portfolio risk
access to expertise
access to large/unusual investments
economies of scale (reducing investment expenses_
possible tax advantages
management perspective
to follow the stated investment objective
to create a return for investors commensurate with the level of risk taken.
Closed-ended
e.g. investment trust company (ITC)
NAV= value of underlying assets of the company/no. ordinary shares
once initial tranche of money has been invested fund is closed to new money. After launch, only way to invest in an ITC is to buy units from a willing seller.
open-ended
e.g. unit trust (UT)
managers can create or cancel units in the fund as new money is invested or disinvested