This article is relevant to anybody who wants to further their career in the financial services industry, whether you are at Certificate Level or Diploma Level.
Whether you are studying for a CF exam or have progressed onto more advanced exams, it is always helpful to re-visit certain topic areas. This month we’re going to take a high-level overview of collective investments.
What is a collective investment?
A collective investment is where investors ‘pool’ their money together to buy investments. So you have lots of people putting their money together and the investment manager invests that money in bulk. Why is this useful? Well, if you had £100 to invest and you invested it yourself, you would have to pay the full amount of the charges and other costs, and you couldn’t invest in a wide range of investments. But if you invested £100 and thousands of others invested other amounts, then the investment manager can spread the cost of charges and can invest in a wide range of investments giving the investor a good level of diversification.
So with a collective investment you have the benefit of using an investment manager, your risk is spread as your money will be spread across many different investments, and as the manager can use the pooled money to buy larger quantities of investments, the costs are lower.
There are many forms of collective investment ranging from Unit trusts and OEICs through to life assurance funds and offshore funds. They fall into three types of collective investment: Corporate based, Trust based and Life assurance based.
Corporate Based
Corporate based are where shares are bought in a company, hence the name ‘corporate’. The company itself is made up of investments in funds. These could be Investment Trusts, Open Ended Investment Companies (OEICs), ICVCs, and most offshore funds. Within a corporate based collective investment you can have either an open-ended or a closed-ended fund.
In an open-ended fund, the value of each unit is the value of the fund divided by the number of units available. So the number of units varies as new units can be created for new investors. The price of each unit is determined by the underlying assets.
OEICs, ICVCs and most offshore funds are open-ended.
Investment Trusts are closed ended. In a closed-ended fund there are a set number of units available and the price is determined by supply and demand. For example, the buying and selling of shares on the stock exchange. If the unit cost is more than the underlying value, then the price is at a premium to the net asset value. If the unit cost is less than the underlying value, then the price is at a discount to the net asset value.
Trust Based
Another type of collective investment is the ‘Trust’. .
It’s called a Trust because, strangely enough, it is based on a Trust! This type of investment is specifically the open-ended Unit Trust. Unit trusts can be one of two different types. Firstly, it can be a distribution type where any income made is distributed to the unit holders on a regular basis. The second type is an accumulation unit trust where any income made is reinvested.
Life assurance Based
The third type of collective investment is life assurance based.
In this case, the investments are linked to life assurance. These include endowments and life assurance bonds.
Endowments are a regular premium life assurance policy. This means that the investor pays a regular amount, for example monthly, into the endowment which is for a fixed term. The endowment will pay out upon death of the life assured or upon maturity of the investment.
Life assurance bonds are a single premium whole of life assurance policy. This means that the investor pays one premium at the start of the policy, and the policy keeps running until the life assured dies, hence the name ‘whole of life’.
The CII’s CF1 study text explains these further, and they are of course discussed at a more detailed level in other exam study texts such as CF2.
|
Print
this Page
