Other investment classes
Purpose of collective investment schemes
investor's perspective
diversification and lower portfolio risk
access to expertise
access to large/ unusual investments
economies of scale (reducing investment expenses)
possible tax advantages
management of CIS's perspective
follow stated investment objective
to create a return for investors commensurate with the level of risk taken.
Closed-ended schemes
e.g. Investment trust company
once the initial tranche of money has been invested the fund is closed to new money
After launch, the only way of investing in an ITC is to buy shares form a willing seller (analogous to investing in ordinary shares in a trading company, ignoring the possibility of a rights issue.)
Open-ended scheme
e.g. unit trust or open-ended investment company
managers can create or cancel units in the fund as new money is invested or disinvested.
NAV per share
the value of the underlying assets of the company divided by the number of ordinary shares
If gearing is allowed, the underlying assets would be net of the debt liabilities
Investment and risk characteristics of an ITC
stated investment objective written into prospectus/ offer for sale document
closed-ended
public company, governed by company law
often quoted on stock exchange
can raise both debt and equity capital
operated by company directors and investment managers (e.g. merchant banks or specialist ITC managers)
Directors and investment managers receive fees
Investor buys 'shares' in the ITC
Share price is determined by supply and demand
Share price often stands at a discount to the company's NAV per share
Investment and risk characteristics of a unit trust (UT)
Stated investment objective
Open-ended
Trust, governed by trust law
Limited ability to gear
Operated by trustees (e.g. insurance companies or large banks) and management company/ investment managers (e.g. life insurance company)
Trustees ensure UT is managed legally in accordance with the trust deed, hold the assets and oversee the calculation of the bid and offer prices and the administration of the UT
Trustees and UT managers receive fees
Investor buys units in the UT
Unit price is based on NAV per unit
Advantages of collective investment schemes vs direct investment
Access to larger/ more unusual investments
Discount to NAV - assets may be bought cheaply (ITC only)
Diversification
Divisibility
economies of scale in the case of larger collective schemes
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 (possibly)
Quoted prices making valuation easier
Suitable for small investors
Tax advantages (possibly)
Disadvantages of collective investment schemes vs direct investment
Loss of control
Additional layer of charges: management fees for investment mangers
Need to hold some cash for liquidity which reduces expected expsire/ return (UT only)
Extra volatility caused by gearing/ discount to NAV changing (ITC only)
Tax disadvantages (possilby)