is a way ofinvestingmoney alongside other investors in order to benefit from the inherent advantages of working as part of a group. These advantages include an ability to:
hire professional investment managers, which may potentially be able to offer better returns and more adequate risk management;
benefit fromeconomies of scale, i.e., lower transaction costs;
increase the asset diversification to reduce some unsystematic risk.
It remains unclear whether professional active investment managers can reliably enhance risk adjusted returns by an amount that exceeds fees and expenses of investment management.1Terminology varies with country but investment funds are often referred to asinvestment pools,collective investment vehicles,collective investment schemes,managed funds, or simplyfunds. The regulatory term isundertaking for collective investment in transferable securities, or shortcollective investment undertaking2or it may be sold only in aprivate placement, such as ahedge fundorprivate equity fund.3The term also includes specialized vehicles such as collective and common trust funds, which are unique bank-managed funds structured primarily to commingle assets from qualifying pension plans or trusts.4
Investment funds are promoted with a wide range of investment aims either targeting specific geographic regions (e.g.,emerging markets or Europe) or specified industry sectors (e.g.,technology). Depending on the country there is normally a bias towards the domestic market due to familiarity, and the lack of currency risk. Funds are often selected on the basis of these specified investment aims, their past investment performance, and other factors such as fees.
Alpha, Beta, R-squared and standard deviation
Internationally recognised collective investments
Further information:Economic history of the Dutch RepublicandFinancial history of the Dutch Republic
The first (recorded) professionally managed investment funds or collective investment schemes, such asmutual funds, were established in theDutch Republic.56Amsterdam-based businessman Abraham van Ketwich (also known as Adriaan van Ketwich) is often credited as the originator of the worlds first mutual fund.
The term collective investment scheme is a legal concept deriving initially from a set ofEuropean Union Directivesto regulate mutual fund investment and management. The, as amended by2001/107/ECand2001/108/EC(typically known as UCITS for short) created an EU-wide structure, so that funds fulfilling its basic regulations could be marketed in any member state. The basic aim of collective investment scheme regulation is that the financial products that are sold to the public are sufficiently transparent, with full disclosure about the nature of the terms.7
In the United Kingdom, the primary statute is theFinancial Services and Markets Act 2000, where Part XVII, sections 235 to 284 deal with the requirements for a collective investment scheme to operate. It states in section 235 that a collective investment scheme means any arrangements with respect to property of any description, including money, the purpose or effect of which is to enable persons taking part in the arrangements (whether by becoming owners of the property or any part of it or otherwise) to participate in or receive profits or income arising from the acquisition, holding, management or disposal of the property or sums paid out of such profits or income.
Collective investment vehicles may be formed undercompany law, by legaltrustor bystatute. The nature of the vehicle and its limitations are often linked to its constitutional nature and the associated tax rules for the type of structure within a given jurisdiction.
who manages the trading, reconciliations, valuation and unit pricing.
who safeguard the assets and ensure compliance with laws, regulations and rules.
who own (or have rights to) the assets and associated income.
A marketing or distribution company to promote and sell shares/units of the fund.
Please see below for general information on specific forms of vehicles in different jurisdictions.
Thenet asset valueor NAV is the value of a vehicles assets minus the value of its liabilities. The method for calculating this varies between vehicle types and jurisdiction and can be subject to complex regulation.citation needed
Anopen-end fundis equitably divided into shares which vary in price in direct proportion to the variation in value of the fundsnet asset value. Each time money is invested, new shares or units are created to match the prevailing share price; each time shares are redeemed, the assets sold match the prevailing share price. In this way there is no supply or demand created for shares and they remain a direct reflection of the underlying assets.
Aclosed-end fundissues a limited number of shares (or units) in aninitial public offering(orIPO) or through private placement. If shares are issued through an IPO,citation neededthey are then traded on an exchange or directly through the fund manager to create asecondary marketsubject to market forces. If demand for the shares is high, they may trade at apremiumto net asset value. If demand is low they may trade at adiscountto net asset value. Further share (or unit) offerings may be made by the vehicle if demand is high although this may affect the share price.
For listed funds, the added element ofmarket forcestends to amplify the performance of the fund increasing investment risk through increasedvolatility.
Some collective investment vehicles have the power to borrow money to make further investments; a process known asgearingorleverage. If markets are growing rapidly this can allow the vehicle to take advantage of the growth to a greater extent than if only the subscribed contributions were invested. However this premise only works if the cost of the borrowing is less than the increased growth achieved. If the borrowing costs are more than the growth achieved a net loss is achieved.
This can greatly increase the investment risk of the fund by increased volatility and exposure to increased capital risk.
Gearing was a major contributory factor in the collapse of thesplit capital investment trustdebacle in theUKin 2002.8910
Collective investment vehicles vary in availability depending on their intended investor base:
are available to most investors within the jurisdiction they are offered. Some restrictions on age and size of investment may be imposed.
are limited by laws, regulations, and/or rules to experienced and/or sophisticated investors and often have high minimum investment requirements.
may be limited to family members or whomever set up the fund. They are not publicly traded and may be arranged for tax- or estate-planning purposes.
Some vehicles are designed to have a limited term with enforced redemption of shares or units on a specified date.
Many collective investment vehicles split the fund into multiple classes of shares or units. The underlying assets of each class are effectively pooled for the purposes of investment management, but classes typically differ in the fees and expenses paid out of the funds assets.
These differences are supposed to reflect different costs involved in servicing investors in various classes; for example:
One class may be sold through a stockbroker orfinancial adviserwith an initial commission (front-end load) and might be called
Another class may be sold with no commission (load) direct to the public called
Still a third class might have a high minimum investment limit and only be open to financial institutions, and called
In some cases, by aggregating regular investments by many individuals, a retirement plan (such as a401(k) plan) may qualify to purchase institutional shares (and gain the benefit of their typically lower expense ratioscitation needed) even though no members of the plan would qualify individually. These also include Unit Trusts.
One of the main advantages of collective investment is the reduction ininvestment riskcapital risk) bydiversification. An investment in a single equity may do well, but it may collapse for investment or other reasons (e.g.,Marconi). If your money is invested in such a failed holding you could lose your capital. By investing in a range of equities (or other securities) the capital risk is reduced.
Thisinvestment principleis often referred to asspreading risk.
Collective investments by their nature tend to invest in a range of individual securities. However, if the securities are all in a similar type ofasset classormarket sectorthen there is a systematic risk that all the shares could be affected by adverse market changes. To avoid this systematic risk investment managers may diversify into different non-perfectly-correlated asset classes. For example, investors might hold their assets in equal parts inequitiesandfixed incomesecurities.
If one investor had to buy a large number of direct investments, the amount this person would be able to invest in each holding is likely to be small. Dealing costs are normally based on the number and size of each transaction, therefore the overall dealing costs would take a large chunk out of the capital (affecting future profits).
Thefund managermanaging the investment decisions on behalf of the investors will of course expect remuneration. This is often taken directly from the fund assets as a fixed percentage each year or sometimes a variable (performance based) fee. If the investor managed their own investments, this cost would be avoided.
Often the cost ofadvicegiven by a stockbroker orfinancial adviseris built into the vehicle. Often referred to ascommissionorload(in theU.S.) this charge may be applied at the start of the plan or as an ongoing percentage of the fund value each year. While this cost will diminish your returns it could be argued that it reflects a separate payment for an advice service rather than a detrimental feature of collective investment vehicles. Indeed, it is often possible to purchase units or shares directly from the providers without bearing this cost.
Although the investor can choose the type of fund to invest in, they have no control over the choice of individual holdings that make up the fund.
If the investor holds shares directly, he has the right to attend the companys annual general meeting and vote on important matters. Investors in a collective investment vehicle often have none of the rights connected with individual investments within the fund.
Each fund has a defined investment goal to describe the remit of the investment manager and to help investors decide if the fund is right for them. The investment aims will typically fall into the broad categories ofIncome (value)investment orGrowthinvestment. Income or value based investment tends to select stocks with strong income streams, often more established businesses. Growth investment selects stocks that tend to reinvest their income to generate growth. Each strategy has its critics and proponents; some prefer ablendapproach using aspects of each.
Funds are often distinguished byasset-based categoriessuch asequity,bonds,property, etc. Also, perhaps most commonly funds are divided by theirgeographic marketsorthemes.
The largest marketsU.S.JapanEuropeUKandFar Eastare often divided into smaller funds e.g. US large caps, Japanese smaller companies, European Growth, UK mid caps etc.
Themed fundsTechnology, Healthcare, Socially responsible funds.
In most instances whatever the investment aim the fund manager will select an appropriate index or combination of indices to measure its performance against; e.g.FTSE 100. This becomes thebenchmarkto measure success or failure against.
The aim of most funds is to make money by investing in assets to obtain a real return (i.e. better than inflation). The philosophy used to manage the funds investment vary and two opposing views exist.
Active managementActive managers seek to outperform themarketas a whole, byselectively holding securitiesaccording to aninvestment strategy. Therefore, they employ dynamic portfolio strategies, buying and selling investments with changing market conditions, based on their belief that particular individual holdings or sections of the market will perform better than others.
Passive managementPassive managers stick to a portfolio strategy determined at outset of the fund and not varied thereafter, aiming to minimize theongoing costs of maintaining the portfolio. Many passive funds areindex funds, which attempt to replicate the performance of a market index by holding securities proportionally to their value in the market as a whole. Another example of passive management is thebuy and holdmethod used by many traditionalunit investment trustswhere the portfolio is fixed from outset.
Additionally, some funds use a hybrid management strategy ofenhanced indexing, in which the manager minimizes costs by broadly following a passive indexing strategy, but has the discretion to actively deviate from the index in the hopes of earning modestly higher returns.
In 1998Richard Branson(head ofVirgin) publicly betNicola Horlick(head of SG Asset Management) that her SG UK Growth fund would not beat theFTSE 100index, nor hisVirginIndex Tracker fund over three years, nor achieve its stated aim to beat the index by 2% each year. He lost and paid 6,000 to charity.
Alpha, Beta, R-squared and standard deviation
When analysing investment performance, statistical measures are often used to compare funds. These statistical measures are often reduced to a single figure representing an aspect of past performance:
represents the funds return when thebenchmarks return is 0. This shows the funds performance relative to the benchmark and can demonstrate the value added by thefund manager. The higher the alpha the better the manager. Alpha investment strategies tend to favour
represents an estimate of how much the fund will move if its benchmark moves by 1 unit. This shows the funds sensitivity to changes in the market. Beta investment strategies tend to favour asset allocation models to achieve
is a measure of the association between a fund and its benchmark. Values are between 0 and 1. Perfect correlation is indicated by 1, and 0 indicates no correlation. This measure is useful in determining if the fund manager is adding value in their investment choices or acting as a
mirroring the market and making little difference. For example, an index fund will have an R-squared with its benchmark index very close to 1, indicating close to perfect correlation (the index funds fees andtracking errorprevent the correlation from ever equalling 1).
is a measure of volatility of the funds performance over a period of time. The higher the figure the greater the variability of the funds performance. High historical volatility may indicate high future volatility, and therefore increased investment risk in a fund.
Depending on the nature of the investment, the type of investment risk will vary.
A common concern with any investment is that you may lose the money you investyour capital. This risk is therefore often referred to ascapital risk.
If the assets you invest in are held in another currency there is a risk that currency movements alone may affect the value. This is referred to ascurrency risk.
Many forms of investment may not be readily salable on the open market (e.g. commercial property) or the market has a small capacity and investments may take time to sell. Assets that are easily sold are termedliquidtherefore this type of risk is termedliquidity risk.
For an open-end fund, there may be an initial charge levied on the purchase of units or shares this covers dealing costs, andcommissionspaid to intermediaries or salespeople. Typically this fee is a percentage of the investment. Some vehicles waive the initial charge and apply an exit charge instead. This may be gradually disappearing after a number of years. Closed-end funds traded on an exchange are subject tobrokerage commissions, in the same manner as astocktrade.
The vehicle will charge anannual management chargeorAMCto cover the cost of administering the vehicle and remunerating the investment manager. This may be a flat rate based on the value of the assets or a performance related fee based on a predefined target being achieved.
Different unit/share classes may have different combinations of fees/charges.
Open-ended vehicles are eitherdual pricedorsingle priced.
Dual pricedvehicles have a buying (offer) price and selling or (bid) price. The buying price is higher than the selling price, this difference is known as thespreadorbid-offer spread. The difference is typically 5% and may be varied by the vehicles manager to reflect changes in the market; the amount of variation may be limited by the vehicles rules or regulatory rules. The difference between the buying and selling price includes initial charge for entering the fund.
The internal workings of a fund are more complicated than this description suggests. The manager sets a price forcreationof units/shares and forcancellation. There is a differential between the cancellation and bid prices, and the creation and offer prices. The additional units are created are place in themanagers boxfor future purchasers. When heavy selling occurs units are liquidated from themanagers boxto protect the existing investors from the increased dealing costs. Adjusting the bid/offer prices closer to the cancellation/creation prices allows the manager to protect the interest of the existing investors in changing market conditions. Most unit trusts are dual priced.
Single pricedvehicles notionally have a single price for units/shares and this price is the same if buying or selling. As single prices vehicle cant adjust the difference between the buying and selling price to adjust for market conditions, another mechanism, thedilution levyexists. SICAVs, OEICs and U.S. mutual funds are single priced.
Adilution levycan be charged at the discretion of the fund manager, to offset the cost of market transactions resulting from large un-matched buy or sell orders. For example, if the volume of purchases outweigh the volume of sales in a particular trading period the fund manager will have to go to the market to buy more of the assets underlying the fund, incurring abrokerage feein the process and having an adverse effect on the fund as a whole (diluting the fund). The same is the case with large sell orders. A dilution levy is therefore applied where appropriate and paid for by the investor in order that large single transactions do not reduce the value of the fund as a whole.
Internationally recognised collective investments
Exchange-traded fundsor ETFsa closed-end fund traded by listed shares on major stock exchanges.
Real Estate Investment Trustsor REITsa close-ended fund that invests in real estate.
(Click here for US SEC description of investment company types).
Mutual FundsOpen-ended with a corporate or trust structure.
Closed-end fundsClosed-ended with corporate structure.
Unit Investment TrustsOpen-ended with a trust structure and limited duration.
Exchange-traded funds(ETFs)Structured as mutual funds or unit investment trusts, but publicly traded.
Exchange-traded funds(ETFs)Open-ended with a corporate structure.
Investment TrustsIntroduced 1868. Closed-ended with corporate structure.
Open-ended investment companies(OEICs or ICVCs)Introduced 1997. Open-ended with a corporate structure.
Unit TrustsIntroduced 1931. Open-ended with a trust structure.
Unitised Insurance FundsIntroduced 1970s. Open-ended with a life policy structure.
With-profits policyOpen-ended with a life policy structure.
Non mainstream pooled investmentfunds – introduced in 2014. Closed-ended or open-ended.
Irish Collective Asset-Management Vehicle(commonly referred to as an
Qualifying investor alternative investment fund (QIAIF)
Loan Originating Alternative Investment Fund (L-QIAIF)
FCP (Fonds commun de placement) (unincorporated investment fund or common fund)
SICAF (Socit dinvestissement capital fixe) (Investment company with fixed capital)
SICAV(Socit dinvestissement capital variable) (Investment company with variable capital)
BEVAK (Investment company with fixed capital)
BEVEK (Investment Company with variable capital)
Instytut spilnogo investuvannya, ISI (Investment Funds)
Private investment fund (Payovyi investytsiyny fond)
Public investment fund (Korporatyvny investytsiyny fund)
Both funds are run by Investment Company (KUA – kompania z upravlinnya actyvami).Funds and companies regulated and supervised by DKTsPFR (Securities and stock market state commission)
We could say that a mutual fund is a pool of money which belongs to many investors. Otherwise a M/F is the common cashier of many investors who trust a third party to operate and manage their wealth. Moreover, they order this third party which in Greece is called A.E.D.A.K. (Mutual Fund Management Company S.A.) to spread their money in many different investment products such as shares, bonds, deposits, repo etc. Those companies in Greece may provide services according to article 4 of Law 3283/2004. People who own units (shares) of a mutual fund are called unitholders. In Greece co-unitholders, which are persons participating in the same units of M/F have exactly the same rights as the unitholder (according to the Law for the deposits in common account 5638/1932). The unitholders have to sign and accept the document which describes the purpose of the Mutual Fund, how it operates, and anything concerning the Fund. This document is the regulation of the M/F. The property of each M/F by law have to be under the control of a bank legally operating in Greece (Greek or foreign). The bank is the custodian of the M/F and except of the custody of the fund also controls the lawfulness of all movements of the management company. The Supervisory and Regulatory Body of M.F. Management Companies and Portfolio Investment Companies is theGreek Capital Market Commission. It comes under the jurisdiction of the Ministry of National Economy and controls the operation of all M/Fs available in Greece. All investors have to be very careful and about the risk they undertake. They have to have in mind that all investments have a certain degree of risk. Riskfree investments does not exist. You can find more about Greek Mutual Funds in the site of the Association of Greek Institutional Investors12or the site of Greek (Hellenic) Capital Market Commission.13
Anlagefonds (unincorporated investment fund or common fund)
SICAV(Socit dinvestissement capital variable) (Investment company with variable capital)
Kommanditgesellschaft fr Kapitalanlagen (Limited Partnership)
Socit dinvestissement capital fixeSICAF (Socit dinvestissement capital fixe) (Investment company with fixed capital)
Listed investment companyor LIC. Closed-ended collective investment either corporate or trust based. Available since 1928.
Managed Investment Vehicle per s 9 of the Corporations Act (Cth) 2001.
Unit trustsopen-ended trust based investments often called
. If the managed investment vehicle is open for retail investors, the managed investment vehicle must be registered with ASIC. An unregistered vehicle has aTrusteewhilst a registered vehicle has aResponsible Entity.
Segregated portfolio companya corporate entity for holding various investments under a single legal entity.
Amedeo De Cesari, Susanne Espenlaub, Arif Khurshed and Michael Simkovic,The Effects of Ownership and Stock Liquidity on the Timing of Repurchase Transactions, 2010
Closed-end funds are a special type of investment fund in the U.S. which is offered to the public, but not redeemable. Lemke, Lins and Smith,
, 4.04[b]; 9.05 (Matthew Bender, 2018 ed.).
Hedge Funds and Other Private Funds: Regulation and Compliance
Goetzmann, William N.; Rouwenhorst, K. Geert (2005).
The Origins of Value: The Financial Innovations that Created Modern Capital Markets
Goetzmann, William N.; Rouwenhorst, K. Geert (2008).
Carbon Finance, Environmental Market Solutions to Climate Change
. (Yale School of Forestry and Environmental Studies, chapter 1, pp. 1843). As Goetzmann & Rouwenhorst (2008) noted, The 17th and 18th centuries in the Netherlands were a remarkable time for finance. Many of the financial products or instruments that we see today emerged during a relatively short period. In particular, merchants and bankers developed what we would today callsecuritization. Mutual funds and various other forms of structured finance that still exist today emerged in the 17th and 18th centuries in Holland.
Carlisle, James (2002-10-30).The Lesson From The Split Capital Debacle.
See Irish Collective Asset-management Vehicles Act 2015(Original Act available here)
AnswersU.S. SEC Investment Companies, Consumer Information
(Venture capital fundMezzanine investment fundsVulture fund)
Loan qualifying investor alternative investment fund(LQIAIF)
Qualifying investor alternative investment fund(QIAIF)
Economic, financial and business history of the Netherlands
Economic history of the Netherlands (15001815)
Early modern industrialization in the Dutch Republic(1580s1700s)
Pulp and paper industry in the Dutch Republic
Amsterdam Stock ExchangeBeurs van Hendrick de Keyser)
Public companypublicly traded companypublicly listed company)
Economic globalizationcorporate globalization)
Articles with unsourced statements from September 2013
Articles with unsourced statements from November 2016
This page was last edited on 2 June 2019, at 21:09