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Transcript
Collective
Investments
There are various types of collective investments. This factsheet
considers the most common which are unit trusts, open ended
investment companies (OEICs) and investment trusts. These
investments enable individuals to pool their money into a fund which
is then invested in a wide range of underlying asset types, such as
shares or fixed interest stocks. The number of underlying holdings
should be greater than an average investor could achieve cost
effectively through a directly invested portfolio. The fund is then
professionally managed to achieve maximum returns consistent with
the stated investment objectives of the fund. Collectives can be
purchased directly from the investment house, via an online dealing
platform or through an independent financial adviser or stockbroker.
Advantages
There are several advantages
provided when investing in
collective funds rather than
individual stocks.
Spreading risk
Collectives can offer investors the
potential to achieve greater returns
than is usually possible from cash
deposits, however, they do involve
taking added risk. Some of this risk
can be reduced because when an
investor makes use of a collective,
they are effectively buying a stake
in a wide range of stocks, rather
than a smaller selection as might
be expected in a direct portfolio.
The more stocks added to a
portfolio, the lower the risk that one
particular stock, or industry sector,
will adversely affect the whole
portfolio. The graph shown overleaf
illustrates that adding more stocks
to the portfolio reduces the volatility
that will be experienced, up to a
point. The volatility cannot be
reduced entirely as there is a level
of pure stockmarket risk which will
never wholly be diversified away.
Reduced dealing costs
Pooling money with that of other
investors allows access to the
expertise of professional fund
managers and the cost
advantages of buying in bulk.
An individual investing a small
amount in a wide variety of
different shares could find dealing
costs very high in proportion to
the investment amounts.
Reduced administration
and performance
monitoring
If an investor holds many shares
directly, there will be
a great deal of paperwork
involved in buying, selling,
collecting dividends, monitoring
performance and so on. With a
collective investment, it is the role
of the fund manager to deal with
all of these aspects and the
investor only has one set of
papers to consider. It is also more
straightforward to compare
performance with similar funds.
50
Capital Gains Tax (CGT)
30
In the case of directly held shares,
each time a share is sold and
another purchased CGT may
be incurred. With collectives,
however, gains crystallised on the
sale of investments within the
fund are exempt from CGT. This
allows the underlying investments
within the fund to be actively
managed without being restricted
by CGT constraints. CGT may be
incurred when the units in the
fund are eventually sold.
25
Unit Trusts
A unit trust is a fund divided into
equal portions called units. The
price of units is calculated
regularly, normally on a daily
basis, and is governed by the
value of the underlying stocks in
the fund. This price will rise and
fall with movements in the price
of those stocks. There will usually
be two prices quoted for such
units, an offer price and a bid
price. The offer price is often
higher than the bid price, normally
by around 5%, and is the price
the investor pays to buy the units.
The lower price, the bid price, is
the price that an investor would
receive when selling the units.
This difference represents the
charge made by the fund
manager and the costs incurred
in buying and selling shares within
the fund.
Average standard
deviation (volatility %)
45
40
35
20
15
10
0
20
40
60
80
100
120
140
Number of stocks in portfolio
Open Ended Investment
Companies (OEICs)
OEICs are very similar to unit
trusts and are managed in the
same way. Instead of buying
units, however, the investor buys
shares in the OEIC and the value
of these shares is directly linked
to the value of all the underlying
assets within the fund. Instead of
a bid-offer price structure the
shares are quoted on the stock
market at a single price to which
buying or selling costs are added.
Investment Trusts
Investment trusts are public
limited companies which invest in
the shares of other companies in
an attempt to make profits for
their own shareholders. Unlike
unit trusts and OEICs, their share
price depends on market
demand and therefore does not
necessarily reflect the value of the
underlying assets. Their price can
therefore be above or below the
value of all the assets in the fund.
This is called trading at a
‘premium’ or ‘discount’. In
addition to the money invested by
shareholders, the investment trust
can borrow to make additional
investments. For example, if the
level of borrowing is high relative
to the share capital, the fund
would be said to be highly
‘geared’. The fund would then be
expected to produce high returns
in rising markets and poor results
in a falling one. Investment trusts
are generally considered higher
risk than unit trusts or OEICs as
their share price fluctuates in line
with supply and demand rather
than being linked directly to the
value of the assets within the
fund.
Collective investments can
provide investors with expert
management and an opportunity
to reduce risk through
diversification. They are not
without risk, however, and the
value of the funds can fall as well
as rise. Collectives can offer
suitable investment opportunities
for many investors, by allowing
access to an extensive range of
funds all with different aims and
objectives, however, we
would always suggest that
professional advice should
be sought to ensure that
appropriate funds are chosen.
Jane Wilson
Manager
www.bonddickinson.com
T: +44 (0)191 279 9899
E: jane.wilson
@bonddickinsonwealth.com
Bond Dickinson Wealth Limited is a limited company registered in England and Wales under no: 8375875
Bond Dickinson Wealth Limited is a wholly owned subsidiary of Bond Dickinson LLP.
Bond Dickinson Wealth Limited is authorised and regulated by the Financial Conduct Authority and their firm reference number is 596652.
BD.1245
Last updated May 2014