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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