Funds are collective investment schemes that pool investments to invest in a range of cash, shares, bonds or other assets. Individual investors buy units or shares, depending on whether the fund is a unit trust or an open ended investment company (Oeic), which entitle them to a share in the overall performance of the fund.
Although there are technical differences between the two types of fund, they are identical from an investor's point of view. Investment trusts also pool investors funds, but they issue a fixed number of shares that are bought and sold on the stock market. Investment trusts are therefore not included in the FT Managed Funds Service.
The main advantages of managed funds are that it is possible to gain exposure to the capital markets by investing small amounts of money - as little as £20 a month in some funds - and that they can provide automatic diversification for investors because they invest in a range of assets. Funds can be held within Individual Savings Accounts, allowing investors to avoid capital gains tax and income tax.
The wide spread of investments lowers the risk of investing in the stock market because it gives investors some protection against the impact of a small number of holdings in individual companies performing badly at the same time. Investing in more than one fund increases portfolio diversity.
Funds also allow investors to put their money into funds managed by specialists, and to devote part of their portfolio to investments that may be risky, but offer potentially high returns, such as emerging markets, commodities and smaller companies.
Funds are tightly regulated, open to all investors, aim for a relative return (beating the rest of the sector, or an index), are not allowed to charge fees related to performance, cannot go short (selling shares they do not own in the expectation of buying them back later at a lower price) and cannot undertake heavy borrowing.
Who runs funds?
Funds that are marketed to the general public must be authorised by a regulator and are run in accordance with rules intended to protect consumers. Most of those available in the UK are authorised by the Financial Services Authority and covered by the Financial Services Compensation Scheme, which provides limited compensation if things go wrong. There are funds that are authorised elsewhere than in the UK, notably in the Republic of Ireland and Luxembourg.
Funds are established, promoted and administered by fund management groups, some of which run very large numbers of individual funds. The assets of funds are held by an independent authorised firm, known as a trustee or depository, which oversees the operation of the fund.
They are managed by specialists, many of whom have built up expertise in a specific fund management area. Some of these managers have become very well known. Several organisations offer ratings for fund managers operating different sorts of funds such as corporate bond funds, North American equities and so on.
The best known rankings are provided by Citywire, at www.citywire.co.uk, and Bestinvest, at www.bestinvest.co.uk. It is worth remembering that managers sometimes move between funds, and that the performance of a particular fund may be affected by a change of manager.
