nottheaverageactuary

Actuarial news and views from Cape Town and beyond

Collective Investments Overview

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A collective investment is a way of investing money indirectly in a diverse pool of assets on a grouped basis with a large number of investors contributing to and benefiting from it. These investments provide access to a diversified portfolio, investments of large unit sizes and professional expertise of fund managers. The investors also benefit from economies of scale as expenses like transaction costs can be reduced for each member. In addition, the indirect investment shields the investor from issues such as the daily management of assets, which is handled by the fund managers on the investors’ behalf.

These funds can have specific aims and strategies. They may invest in certain geographical areas (domestic vs. foreign) or certain industries. Depending on their strategies, they can focus on capital gains and become a capital growth fund or focus on dividends as a high income fund.

The term used varies with countries and collective investment schemes or vehicles are often referred to as an investment funds or investment pools. There are also many branches and types of collective investments that differ by factors such as constitution, availability, investment style, fee structure, regulations and many others:

  • The constitution of funds may be close-ended or open-ended, which relate to how investors invest in the scheme. An investment trust company, for instance, is close-ended, while a unit trust would be open-ended.
  • An investment scheme may be offered to the general public or private investors only. An example of the latter is hedge fund, which is becoming increasingly popular today.
  • Broadly funds can be classified as active or passive funds by their investment style. The fund managers may invest actively by predicting market movements or passively by tracking the market to earn a stable return.
  • The fees charged often differ by the investment style. Active funds have high fees for their intensive operations and potentially higher returns. For example, hedge funds have a popular “2&20” fee structure, which means 2% of total assets as management fee and 20% of any profits as performance fee. On the other hand the fees can be as low as just a 0.06% management fee for some passive funds.
  • Different funds are subject to different types of laws and regulations such as company law or trust law. These may affect the operation of the funds by placing restrictions or guidelines on issues such as gearing and investment choices. Certain funds can avoid these restrictions and have additional flexibilities. For example, hedge funds can bypass many restrictions by being private.

Therefore, although there is a large number of collective investment schemes. They are differentiated by many factors and virtually every fund is different.

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