Type of funds
Mutual Funds (including Unit Trusts and OEICs)
These funds are open-ended funds, meaning they can get larger or smaller depending on the number of investors who wish to buy into them. As more people invest in the fund, the number of underlying shares grows; as they sell, the number reduces. In the majority of cases these type of funds are actively managed. An example of this would be the Robeco US Large Cap Equity Fund. The aim of the fund is to invests in largecap stocks in the US market.
Exchange Traded Funds (ETFs)
Exchange traded funds (ETFs) are similar to the funds mentioned above except that they act like a share themselves. ETFs are openly traded on stock exchanges such as the London Stock Exchange in the UK or the Nasdaq in the US. Most ETFs aim to perform in line with a specific index (e.g. S&P 500) or commodity (like gold) and often have low management fees. An example of an ETF would be the Vanguard S&P 500 ETF (VOO) which invests in stocks that are part of the S&P 500.
These are funds registered as public limited companies (PLCs) with their own management teams and boards of directors. They can invest in public and private companies, have a specific number of shares in issue (therefore considered as close ended) and are traded on a stock exchange themselves. An example would be the City of London Investment Trust (CTY).
Types of Fund Management approaches
A fund can be passively managed where the investor can gain exposure to a particular index or commodity, providing that investor with the same returns as the underlying market. A type of passively managed fund is an Exchange Traded Fund (please refer to ETF section above) which tracks the S&P500.
Actively-managed funds invest in a collection of companies the fund manager feels can outperform the index. (For instance for a UK Equity Fund the index to beat would normally be the FTSE 100 index. This index includes the biggest 100 companies in the UK market). To identify companies where to invest in, fund managers analyse company fundamentals, meet the management and work to maintain a balance of good companies that will perform better than the market average in various market conditions. Unlike passively managed funds, these funds don’t track the movement of a particular stock market index.
Active managed funds are suitable for investors who do not have the time or expertise to construct and monitor a portfolio themselves. They require a smaller investment than picking individual stocks or bonds allowing the investor to gain access to a far greater number and variety of securities.
Fund of funds (Multi Manager Fund)
A fund of funds invests primarily in other investment funds, which can be a mix of actively and passively managed, rather than directly into individual companies. They provide an alternative to putting together your own portfolio of funds, monitoring and making changes. They provide ready-made portfolios managed by expert fund managers. An example would be the Jupiter Merlin Growth Portfolio (see fact sheet below).
How is a price of a fund calculated?
When investing in a mutual fund, you would actually hold ‘units’ in the fund and these units would reflect a price.
The easiest way to find out the price of a mutual fund is to look at its net asset value (NAV). NAV is the total value of a mutual fund's assets, less all of its liabilities. Many mutual funds use this number to determine the price for transacting units of the fund. When you buy and sell mutual funds, you typically do so at the NAV.
For most mutual funds, the NAV is calculated daily since a mutual fund's portfolio consists of many different stocks. As each one of these stocks may be changing in price frequently throughout the day, an exact value of a mutual fund is difficult to determine. Thus, mutual fund companies have chosen to value their portfolio once daily, and each day this is the price at which investors must buy and sell the mutual fund.
Funds are also quite liquid since the majority of them deal on a daily basis with the price updated at the end of each trading day. This however works a bit different from traditional investments like shares and bonds which can trade at different times during the day.
In simple terms it means that if for example you place a trade today, the fund will settle in your account in two or three business days although the price taken would that of today. Different funds might have longer dealing periods so it is always important to check the prospectus.
One of the major cornerstones of fund management is diversification. This is because it is considered a key investment strategy for helping preserve wealth by diversifying across different asset classes (equities, government bonds, corporate bonds, property, cash etc) as well as across geographical regions.
This approach helps to manage and mitigate the risk of any one asset type underperforming over time, ensuring you are not over exposed to any given asset type, country, sector or stock. At the same time the aim is to provide the highest potential return for your risk profile.
As an investor one can either pick a number of different funds that focus on different strategies, regions, asset classes and currencies and construct an overall portfolio or else choose fewer fund of funds which are already diversified themselves.
Fund Manager Mandates
Every fund which is created would have a mandate written on the prospectus that provides the guidelines of what a fund manager can or cannot do in that particular vehicle. Here are a couple of examples for different mandates available:
Equity funds – manager can invest in equities across the globe or else more specific to a particular region (e.g. Emerging Markets) or country (e.g. China)
Market Cap biased Equity funds – manager can either have a holistic mandate (All cap approach) or else more specific (e.g. Large Cap only or Small Cap only stocks).
Growth or Income Equity Oriented funds – manager would either go for shares which generate a good level of yield or else focus on price appreciation for stocks in order to increase the capital return over time.
Sector Specific funds – manager can invest in specialised sectors (e.g. Financials, Bio-technology, Healthcare).
Government Bond Funds – manager invests in government or governmental relate bonds. These can either be country specific, regional or across the globe and in different currencies.
Corporate Bond Funds – manager invests in corporate bond funds. These can either be country specific, regional or across the globe and in different currencies.
High Yield Bond funds – manager will invest in high yield bond funds. These can either be country specific, regional or across the globe and in different currencies.
Absolute Return Funds - the aim of the manager is to generate positive return irrespective of the market conditions.
Property Funds – manager invests in direct property or indirect property instruments (real estate investment trusts or property related equities).
Commodity Funds – manager invests in commodities (e.g. gold and oil), or commodity related instruments like mining shares or oil producing companies.
Multi Asset blended Funds – Managers can of course blend different strategies and asset classes in their mandate and thus diversify their offering.