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Types of open ended investments (Sociétés d’investissement à Capital…
Types of open ended investments
Unit trusts
The Financial Conduct Authority regulates the sales and marketing of unit trusts
Some may focus on high income while others may focus on capital growth
There are balanced unit trusts that endeavour to achieve a combination of both capital growth and income growth
Intended to spread investment over a wide range of assets in order to reduce risks
Diversification enables an individual investor together with many other individual investors to have access to a large and diversified portfolio of underlying assets for a relatively small amount through a single investment which they probably would not be able to achieve themselves
Less common for them to invest in a physical property because if a significant number of investors were suddenly to decide to sell their units, it might prove more difficult to realise property investments rather than other forms of investment
All will have a trust deed, the parties to which will be a manager (a limited company) and the trustees in which the legal title is vested (a financial institution such as a bank)
The trustees will hold the assets of the unit trust comprising a varied range of underlying assets on behalf of the beneficiaries - the unit holders
The underlying assets will be valued and divided over a number of units
Units are bought and sold using a spread
The price at which the fund manager sells units (the offer price) is the creation price and the price t which the fund manager buys units (the bid price) is the liquidation price
In addition to the spread differential there may be other charges including
An initial charge covering set up costs, typically 2-3% of the value of the units purchased
An annual management charge of 1-2% of the value of an individual total unit holding
An exit charge where there is not an initial charge
Open Ended Investment Companies
Are run as companies with a board of directors issuing shares rather than units
The shareholders own a fund's underlying assets
Regulated by the FCA
Contributions are combined with other shareholders funds and are invested in a selection of stocks, shares and other assets by the fund manager
The pooling of money with that of other investors provides the fund manager with more buying power to make additional and more diverse investments than could be effected by any individual investor. This reduces risk by spreading the fund across a number of different investments
The value of an OEIC fund is linked to the performance of its portfolio
When the value of the underlying portfolio increases, the value of investors shares will grow too
The shares of OEICs are subject to single pricing meaning that there is neither a bid nor offer price and there is only a single price for both buying and selling shares
Any initial charge is taken as a separate commission rather than as a spread
Have variable capital thus fund managers will rate new shares as money is invested and cancel existing shares when funds are withdrawn
Underlying assets are divided into equally priced shares, subject to daly revaluation
The price of OEIC shares varies directly with the underlying net asset value of each fund
Investment company with variable capital
Used in mainland Europe
Open ended and created in such as manner that they can be offered on a pan European basis and are structured as companies and controlled by an authorised corporate director who fulfils the role of fund manager
The assets are owned by the depository whose role is similar to that of a unit trust trustee
Sociétés d’investissement à Capital Variable
Opened ended collective investment scheme constituted as an investment company and similar to a UK OEIC
Issues shares rather than unit
Offshore funs domiciles outside of the UK and are mostly prevalent in Western Europe, especially Luxembourg, Switzerland and France but may still be marketed throughout Europe including to UK investors
Investors are shareholders and are allowed to express they views on the management of the company at the annual general meetings
Often have many sub funds that invest in many different global markets including
Equity funds
Bond funds
Property funds
Smaller companies sector
Taxed differently to OEICs in the UK as they operate under the jurisdiction of the country where they are located
A main consideration for UK investors is whether these funds have ‘distributor’ or ‘non-distributor’ status, as this affects how they are taxed
If they have a distributor status they are taxed as per a UK unit trust
If they have non distributor status, all returns are taxed as income which is less attractive for many UK investors as they cannot use their capital gains tax allowance to avoid tax on gains
The boards of SICAVS must apply for distributor status each year in order to qualify for this status, it is a requirement that 85% of yearly profits have to be distributed to investors by way of dividends
SICAVS are UCITS III funds which means their managers have the ability to use derivatives to generate higher returns rather than to simply reduce risk
Tend to have higher fees than unit trusts and OEICs. Their total expense ratio - a measure of their management and performance fees tend to be higher than those of an OEIC
Time zone differences mean that SICAVs are valued at 3 pm while most funds in the UK are valued at noon. Because of this many fund supermarkets have yet to offer SICAVs to retail customers
Fonds communs de Placement
Open ended mutual funds constituted as a contractual common ownership entity without legal personality
A co-ownership entity that issues units of a fund; the investor is a member of the co-ownership but has no rights related to a shareholder
Like unit trusts, they are professionally managed open ended collective investment schemes
The Irish Common Contractual Fund
An Irish regulated asset pooling fund structure, first introduced in 2003 which enables only institutional investors to pool assets into a single fund vehicle with the aim of achieving cost savings, enhanced returns and operational efficiency through economies of scale
Unincorporated body established under a deed where investors are co-owners of underlying assets held pro rata with their investment
Established by a management company and only institutional investors are permitted in this strucutre
Authorised and regulated by the Central Bank of Ireland and can be structured as UCITS or an AIF
Taxation of CCF
Transparent for Irish legal and tax purposes
Investors are treated as if they directly own a proportionate share of the underlying investments in the CCF and profits are treated as accusing or arising to the investor if they had not passed through the CCF
The availability of double tax treaties reliefs are between the investor and investment jurisdiction
The CCF benefits from Ireland's competitive tax regime providing certainty, stability and transparency
A CCF can avail of tax transparency in over 20 markets of investment, eg Australia, Canada, Germany, Italy, the UK and USA
The CCD benefits from a tax neutral regime
Can be used as an efficient pooling master vehicle under UCITS IV allowing direct investment for institutional / pension funds seeking tax transparency
Have a flexible strucutre to meet the demands of asset owners such as multinationals and can be established as a single or multi fund vehicle with single or multiple managers