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A strong case for Fund Investing

  • Head of Investment Management & Fund Services
  • Blog post submitted on 28th February 2014

A strong case for Fund Investing


Much has been said and written in recent years about whether Fund Investing is an effective way of managing your financial assets, with some going as far as describing them as high-cost, under-achieving products. Some notable high profile Fund closures, particularly in the commodity hedge fund space but not only, have helped in no small measure to fuel the debate amid a general sense of unwarranted pessimism. But is it all doom and gloom for private investors or is the pooling of investment capital through structures of this sort still the way forward?


In many ways, collective investment schemes (another term commonly used to refer to Funds) revolutionised the industry by bringing capital markets to the masses in a relatively cheap and easy manner. Historians are uncertain as to the exact origins of investment funds though there are some indications that the idea of pooling assets for investment purposes began in the Netherlands in the late 18th or early 19th century. However, the creation of the Massachusetts Investors’ Trust in Boston in 1924 is cited as the arrival of the modern mutual fund in the US.


The major benefits of investing through a Fund, as opposed to investing directly in individual bonds or shares, include the spreading of risk through a diversified portfolio, access to more specialised investment strategies and cost effectiveness. By delegating the investment decisions to a professional Fund Manager, an investor is essentially ensuring that the investment portfolio is being actively managed and re-balanced in response to the daily complexities of today’s international financial markets, something which is particularly difficult to achieve with smaller portfolios.


It is interesting to note however that Funds’ relative success has not been limited to a private investor base in recent years. In fact a recently published survey by ‘Morningstar’ suggests that investment funds are becoming the dominant vehicle used by both financial advisors and institutions to access the majority of alternative investment strategies. Alternative investments typically include hedge funds, managed futures, real estate and commodity-driven strategies as opposed to the traditional asset types of cash, bonds and equities.


Many commentators maintain that investors are shunning decision-making in the face of so much global uncertainty. It is particularly difficult for many investors to pick the best stocks and manage asset allocation on their own. A professionally-managed Fund overcomes this problem because the Fund Manager makes the asset allocation decisions for investors and selects the underlying investments in turn. Market volatility in recent years has made a lot of private investors realise that it is harder to respond to the market than they originally thought.


Whilst there are no steadfast rules for selecting a Fund, some basic facts on what you should be looking out for when choosing between one Fund and another include:

ü  Structure of the Fund: go for a recognisable brand and a well-known jurisdiction. In this respect, UCITS funds are ideal for retail investors as they have been specifically designed to ensure diversification and liquidity through carefully carved out investment parameters, permitted asset classes and restrictions as set out in EU law. Opting for an established product structure also facilitates the due diligence process.

ü  Total Expense Ratio (TER): no surprises here, but the lower the overall running cost of the Fund, the greater are the chances that the Fund will generate superior returns. We particularly urge investors to enquire about the TER as opposed to the Annual Management Charge as this (the AMC) is just one of the costs the Fund would be incurring.

ü  Track record: this relates both to the individual Fund Manager as well as the Fund Management company. Though the past is never a guarantee of future success, Fund Managers with a proven track record should be preferred over others with less to show for their labour.

ü  Liquidity: in most cases, investors can redeem all or part of their investment in a fund at any time they wish and receive the current value of the shares. Funds are more liquid than most investments in shares, deposits and bonds.

ü  Compounding: Any distributions that are paid by the fund can be automatically re-invested into additional units of the same fund at no cost. This helps to ensure that investors are staying fully invested, thus maximizing their returns through compounding.


The case for Fund investing, in our opinion, is strong and recently released numbers tend to support our view. ‘Lipper’s Global FundFlows 2013 year-end report on trends in the investment funds space’ confirmed that 2013 was a year of solid growth with assets up $2.7 trillion net, with $2.2 trillion of the increase being due to the rise in equity funds’ assets under management.


The bigger challenge facing investors, in our opinion, is to correctly identify those managers who they believe may outperform in advance and stick with them through good times and bad.