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Collective funds contain a large number of different investments. Managed funds and with-profit funds, for example, can hold shares, gilts, corporate bonds, property, etc. More typically a collective fund will only hold investments from a particular geographical area, and further restrict the holdings to a specific type of asset, for example N. American equities, European corporate bonds and UK commercial property. The fund is therefore placed in a specific market sector.
Some collective funds hold other funds. For example a manager of manager fund holds a range of collective funds controlled by managers they think are particularly good at managing funds!
Why should I use them?
By pooling money with many other investors you can invest in areas that would otherwise be uneconomic or too high a risk to do with individual shares. Importantly, careful selection of funds from different sectors (asset allocation) allows a portfolio to be built with diversification both inside the funds and between market sectors. This effectively reduces volatility and the level of risk further, yet allows exposure to varied investment areas with improved potential for growth.
What types of collective fund are available?
There is a vast range of collective funds available for investment and the nature of each can be quite different. The main types are:
Unit trusts - collective funds that hold any number of investments. The actual numbers vary but are typically in the range 50-100. The number of units issued at any one time can vary, and will increase with demand. The value of a unit is broadly equivalent to the value of the underlying investments divided by the number of units currently issued.
Unit trusts are subject to an initial charge so the buying and selling prices are different. This difference is called the bid/offer spread.
Investment trusts - companies that hold a variable number of investments. These companies have a fixed number of shares and so their value depends not only on the value of the underlying investments but also on supply and demand.
The actual price of an investment trust share may be higher (at a premium) or lower (at a discount) than the value of its underlying investments (net asset value).
Unlike unit trusts, investment trusts can borrow money to purchase more investments. The amount borrowed is called the gearing. This is the main reason that investment trusts have a slightly higher risk than unit trusts holding the same underlying investments.
Like unit trusts, investment trusts have a bid/offer spread.
Open-Ended Investment Company (OEIC) - collective fund that is a sort of hybrid between an investment trust, as the holding is in shares rather than units, and a unit trust as the number of shares issued can vary.
OEICs are single charged so do not have a bid/offer spread.
Investment bonds (sometimes called insurance bonds) - are issued by life companies and are often called collective funds. They are really a wrapper for other investments as a bond can hold many types of assets, for example unit trusts and OEICs.
© John Bramwell 2005
BV Services is Authorised and Regulated by the Financial Services Authority
Get your finances
in good shape!
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