Collective investments: Investment Trusts, Unit Trusts, Oiecs, ETFs, REITs and Index Trackers
Avoiding putting all your eggs in one basket is a basic tenet of investment, and this means having a spread of different investments. You or your financial advisor can make your own spread of investments but unless you are close to the markets or get a particular pleasure from following the prices and fortunes of your investments in individual companies there is much to be said for ‘collective investments’ where a manager makes the decisions as to what to buy and sell on a daily basis, and you own a portion of the portfolio he runs. They also have the considerable advantage that these collective investments are not liable for capital gains tax on changes in the underlying portfolio as you would be if you manage your own spread of individual investments. Finally the charges of managers of some collective investments (particularly investment trusts) may be less than the charges you pay for an individually managed portfolio.
Investment Trusts and Unit Trusts
There are technical differences between investment trusts, unit trusts and oiecs.. For instance, Investment trusts (whose shares are listed on the Stock Exchange) can borrow money to increase the size of their portfolio ( so leveraging your interest in the portfolio) and their shares may trade in the stockmarket at a discount or premium (usually the former) to their underlying asset value. Unit trusts are ‘open end’ and you can buy or sell them at asset value direct from the managers. .
Charges for unit trusts and oiecs are normally higher than for investment trusts, but in the long run investment performance is usually much more important than charging structure.
Collective investments make excellent ‘core holdings’ in a portfolio but some have performed better than others. Know who the managers are and their record, and what their objectives are in any particular trust.
Information on investment trusts from the trade body, the Association of investment Companies. http://www.theaic.co.uk/guide/ .
www.aicstats.co.uk has an interactive version of the monthly AIC Stats publication enabling you to rank and compare AIC Members.
Information on unit trusts from the trade body the IInvestment Management Association www.investmentfunds.org.uk/investors/default.asp
information on specialist investment trusts for property www.reita.org/live
ETFs - Exchange Traded Funds
The number of ETFs has grown rapidly, and now exceeds 1700, including some 120 which cover individual commodities 'from cotton to coal to coffee', as wellas gold.
ETFs (many of which are listed in London) are investment funds tracking a particular index (eg the FTSE 100) or sector. Like a ''tracker fund' they provide diversification, and like a share they are traded on the stock exchange through stockbrokers. Most ETFs pay out dividends at regular intervals, and managment charges are typically 0.5% or less. Unlike shares, stamp duty is not payable on purchasing an ETF.
If you are concerned with asset allocation rather than stock picking, then ETFs are a simple and relatively inexpensive way of investing in a chosen market.
To learn more about ETFs, check prices and compare performance see http://funds.ft.com/ETFHomepage.aspx .
Real Estate Investment Funds (REITs)
There is a seperate topic page on this - see REITs
An Index tracking funds sets out to track the performance of a particular index eg S&P 500 or FTSE All Share index. The rationale for buying an index tracker is that few traditional investment managers beat the index regularly and on that basis it is easier and a great deal cheaper in management fees to buy and hold an index fund. For a descriptive article see:
A tracker fund for hedge funds - Goldman Sach's Absolute Return Tracker Index ('ART') aims to give the return which you would get from a 'fund of hedge funds' at a fraction of the cost.
Traditional index tracking funds are weighted by the market capitalization of the individual companies which constitute that index. The cynic might say that this amounts to buying hign and selling low, since the index will contain more of the stocks which have gone up and less of those which have gone down. Hence the recent popularity of ‘fundamental indexing’ where the indices are measured not by the market capitalization of the companies in the index but by their earnings or dividends or other measures. See
For advice on buying or selling contact your financial advisor!
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