Collective Investments - UK - November 2007

Abstract

The collective investments market continues to experience strong growth on the back of financial markets that are performing well. The public has a long memory when it comes to events in the financial world, though, and recovery from the dotcom bubble that burst in the early part of the decade has been gradual. Not surprisingly, for years, net sales of collective investments have tracked closely the performance of the FTSE 100, and this fallout from the credit crunch is likely to see sales hit.

The fact remains that collective investments hold little attraction for a majority of people. Whilst stocks and shares ISAs were once more popular than cash ISAs, that is hardly the case now. Ignorance and apathy remain and Mintel' s consumer research shows that there has been no change in the past year in the number of people holding collective investments outside of ISAs.

Reports of the death of the independent financial advisor (IFA) have never been more premature as the channel continues to grab more and more of product distribution. Platforms and fund supermarkets have become the industry' s main battle ground. The Financial Services Authority (FSA) has conducted its review of distribution and has targeted the fee and commission structure for change.

Specific types of Collective Investments

• Unit trusts are investment funds shared by lots of different investors. They are ' open-ended funds' , meaning that each fund gets bigger as more people invest, and gets smaller as people withdraw their money. Funds are divided into segments called ' units' . Investors take a stake in the fund by buying these units. The price of a unit is based on the value of the investments that the trust has invested in.
• An open-ended investment company (OEIC) is a company whose business is managing an investment fund. Investors take a stake in the fund by buying the shares of the OEIC. As with a unit trust, an OEIC is an open-ended fund. An investment trust is a company whose line of business is investing in other companies. The investment trust company has shares and is quoted on the stock market. Investors take a stake in its fund by buying the shares of the company. It is a ' close-ended fund' because there are a set number of shares, and this number does not change regardless of the number of investors. The price of the shares reflects the value of the investments in the fund, but is affected by other factors too. If more people want to sell their shares than there are people wanting to buy them, the share price tends to fall. Conversely, if there are more buyers than sellers, the share price tends to rise.
• As such, and unlike OEICs and unit trusts, investment trusts can trade at a premium (or discount) to the value of the assets held by the trust. The other key difference is that the company can borrow money and use it to buy more investments - this boosts the company' s returns when the investments perform well, but magnifies losses if investments do badly.