Collective Investment Funds

 

A collective investment scheme is a way of investing money with a large number of people to participate in a wider range of investments that may not be feasible for an individual investor hence many investors share the costs of doing so. Collective investments are promoted with a wide range of investment aims either targeting specific geographic regions (e.g. Emerging Markets, Europe, North America) or specified themes (e.g. Technology, Commodities, Health Care).

 

 

 

The two most popular types of Collective Investment Funds are:

 

•  Unit Trusts
•  OEICs or ICVCs

 

Unit Trusts

 

A Unit Trust is a form of collective investment constituted under a trust deed. Unit trusts are open-ended investments; therefore the underlying value of the assets is always directly represented by the total number of units issued multiplied by the unit price less the transaction or management fee charged. Each fund has a specified investment objective to determine the management aims and limitations.

 

Structure

 

•  The fund manager runs the trust for profit.

• The trustees ensure the fund manager keeps to the fund's investment objective and safeguards the trust assets.

•  The unit holders have the rights to the trust assets. Unit trusts are open-ended; the fund is equitably divided into units which vary in price in direct proportion to the variation in value of the fund's net asset value. Each time money is invested new units are created to match the prevailing unit buying price; each time units are redeemed the assets sold match the prevailing unit selling price. In this way there is no supply or demand created for units and they remain a direct reflection of the underlying assets.

 

The trust manager makes a profit in the difference between the purchase price of the unit or offer price and the sale value of units or the bid price. This difference is known as the bid-offer spread. Typically the bid-offer spread is 5% but this may vary. The trust deed often gives the manager the right to vary the bid-offer spread to reflect market conditions, with the purpose of allowing the manager to control liquidity. To cover the cost of running the investment portfolio the manager will collect an annual management charge or AMC. Typically this is 1 to 2%.

 

 
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OEICs or ICVCs

 

An ICVC or Investment Company with Variable Capital is a type of open ended collective investment formed as a corporation under the Open-Ended Investment Companies Regulations. As an open-ended company the manager must create shares when money is invested and redeem shares as requested by shareholders. ICVCs are also known as Open-Ended Investment Companies or OEICs from the regulations that formed them; the terms are used interchangeably. ICVCs are open-ended; the fund is equitably divided into shares which vary in price in direct proportion to the variation in value of the funds net asset value . Each time money is invested new shares 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.