2.2.3 Fund managers – central to the way we invest
Investment firms play a central role in the financial services industry. The firms include:
- investment trusts
- unit trusts
- open-ended investment companies (OEICs).
There are clear legal and operational differences between these, although ultimately their investment objectives – to maximise returns to investors, subject to the constraints that are applied to their holdings of assets – are the same.
An investment trust is a limited-liability company that raises funds for investment by issuing shares on the Stock Exchange. Once an investment trust has been launched, it takes in no new funds unless it issues new shares in the form of a rights issue. Consequently, investment trusts are also referred to as ‘closed-end funds’. Shareholders of the trust can only extract the funds they invested by selling the shares issued to them on the Stock Exchange. However, some investment trusts do have pre-set dates at which they will be wound up. At this point, after creditors have been paid, the investors will recover the remaining value left in the trust.
Unit trusts are not companies; rather, they are trusts that raise funds by issuing investment units to investors. These units are not quoted on the stock exchange. Instead they can be directly bought from and sold to the managers of the trusts. Issuance is made on demand, as are repayments of existing units, albeit at the prevailing market price of the units, which in turn is dictated by the prices of the underlying assets that the unit trust’s funds are invested in. Because unit trusts are continually open to new funds from investors and can create or cancel the number of units in issue to meet supply and demand, they are referred to as ‘open-ended funds’.
In 1997, legislation was passed in the UK allowing open-ended investment funds to be formed into limited companies. Unlike normal companies, these OEICs have the power to issue and buy back their shares on an ongoing basis. This gives them the same operational flexibility as traditional unit trusts. Most new unit-based investment funds are OEICs, and some existing unit trusts have converted to OEIC status – incentivised by the economies in running costs that can be achieved because several funds can be run within one OEIC structure.
Table 4 shows the assets under management in UK investment trusts and unit trusts in 1995 and in 2013.
| Assets | 1995 | 2013 |
|---|---|---|
| UK gilts | £3.1bn (2.0%) | £38.3bn (4.1%) |
| UK shares | £78.5bn (50.7%) | £255.1bn (27.4%) |
| Non-UK shares | £55.6bn (35.9%) | £297.1bn (31.9%) |
| Total shares | £134.1bn (86.6%) | £552.2bn (59.3%) |
| Other UK securitiesa | £4.2bn (2.7%) | £61.3bn (6.6%) |
| Other non-UK securities | £4.3bn (2.8%) | £89.0bn (9.6%) |
| Total other securities | £8.5bn (5.5%) | £150.3bn (16.2%) |
| Property and land | £1.9bn (1.2%) | £13.7bn (1.5%) |
| Other assets including short-term liquid assets | £7.1bn (4.6%) | £176.2bn (18.9%) |
| Total | £154.7bn (100%) | £930.2bn (100%) |
From the viewpoint of the investor, there are two general attractions of investments in trusts. The first perceived advantage is that the collectivisation of investment provides an efficient means of investing sometimes small amounts of money across a range of assets. Such diversification of holdings could not be achieved so efficiently – indeed, it might not be practical at all – if the investor acted alone. The second perceived advantage is that, by placing funds within a trust, investment decisions are passed (at least in part) to a professional team of investors, with the expectation that higher returns will be achieved than if the investor acts alone. However, data on investment performance by trusts – and generally by professional investment managers within the industry – does cast considerable doubt on the view that the ‘professionals’ consistently outperform the average returns from the markets they are active in.
