n00b question about funds

GingerFurball_2

This probably seems completely obvious, but my brain isn't working right now!

If I set up "GingerFurball's Emerging Markets Fund" and set the fund price at £1 (ignore whether this is realistic or not, this is purely for mathematical simplicity), and 1 million investors each bought in for £1, would that then give me, the Fund Manager, £1m to invest in the stockmarket for the fund?

If I'm assuming correctly, and my investments double to be worth £2m after a year, does that mean that everyone's £1 investment is now worth £2?

Basically, if the Fund Manager manages the fund well to achieve growth, is that how a potential investor makes his money from investing in funds? Instead of making the investment individually, you essentially give the money to someone else to invest for you and hope that they do a good job with it?

Lokolo

Yes pretty much.

Eco_Miser

Except that the Fund Manager would have £950,000 to invest and GingerFurball and the sales team would split £50,000 (with a typical 5% spread)

mr_fishbulb

GingerFurball wrote: »

If I'm assuming correctly, and my investments double to be worth £2m after a year, does that mean that everyone's £1 investment is now worth £2?

Yes, but to take the exercise a little further:

If you had an oven-ended fund such as an OEIC or a Unit Trust, then the public and institutional investors will see your growth from £1 to £2 and think "I want a piece of that". They will then start piling their money in, which you as the fund manager, will need to decide what to do with.

It is unlikely that you will be able to invest that money in something which will also go up as quickly again, so your growth will start to slow. This is when you take people from the Sunday Times and Hargreaves Lansdown out to lunch so they can write an article on how Emerging Markets have a lot of growth still to come, and how GingerFurball's Emerging Markets Fund is the place to invest if people want to take advantage of it. They can even interview GingerFurball and you will say "I believe Emerging Markets will have a lot of growth over the next year". This will get you as much money in as possible from the sheep, many of them will leave their money in there whilst your fund's performance lags, but you won't care as you are taking so much from the management fees.

On the other hand, if you set up GingerFurball's Emerging Markets Fund as a closed ended fund such as an Investment Trust (and for the sake of simplicity, leave aside your ability to borrow money to invest), you won't get a new influx of money coming in. If people want in then they will have to find someone who already holds units willing to sell them. You don't get the problem of continually needing to find investments for the money coming in.

Loughton_Monkey

GingerFurball wrote: »

If I'm assuming correctly, and my investments double to be worth £2m after a year, does that mean that everyone's £1 investment is now worth £2?

In practice, there can be a 5% up front charge (often waived) so the punters are paying £1.05 per unit.

Then, of course, there are lots of dealing fees, stamp duty etc. These are deducted from the fund values automatically [they are not included in the management charge]. After that, there are 'Management Charges' of around 1½% taken off as well.

But don't believe that the fund manager is running around all day, switching this share, selling these bonds, watching the market screens.......

Basically, they have already stuffed the £100 million in investments. Then the young back room lads will look at the day's trading. £3.5m in, £3.4m out. So just £100K to invest today. Shove it in the biggest holding, and then go home (via favourite wine bar).....

Large Chardonnay's all round......

GingerFurball_2

Loughton_Monkey wrote: »

In practice, there can be a 5% up front charge (often waived) so the punters are paying £1.05 per unit.

Then, of course, there are lots of dealing fees, stamp duty etc. These are deducted from the fund values automatically [they are not included in the management charge]. After that, there are 'Management Charges' of around 1½% taken off as well.

But don't believe that the fund manager is running around all day, switching this share, selling these bonds, watching the market screens.......

Basically, they have already stuffed the £100 million in investments. Then the young back room lads will look at the day's trading. £3.5m in, £3.4m out. So just £100K to invest today. Shove it in the biggest holding, and then go home (via favourite wine bar).....

Large Chardonnay's all round......

Yeah, I get that, was just looking for an explanation in very basic terms how investors make money from funds.

Other question I have is about FTSE tracker funds - presumably the FTSE index correlates very roughly to the performances of shares within the FTSE 100 - so if the FTSE index is going up, then roughly speaking so are the values of the shares?

Obviously, in any given day where the FTSE index rises, there's going to be shares that drop in value, and those that rise in value won't rise at the same rate - but is my extremely basic understanding of how the FTSE index works basically correct?

Linton

GingerFurball wrote: »

Yeah, I get that, was just looking for an explanation in very basic terms how investors make money from funds.

Other question I have is about FTSE tracker funds - presumably the FTSE index correlates very roughly to the performances of shares within the FTSE 100 - so if the FTSE index is going up, then roughly speaking so are the values of the shares?

Obviously, in any given day where the FTSE index rises, there's going to be shares that drop in value, and those that rise in value won't rise at the same rate - but is my extremely basic understanding of how the FTSE index works basically correct?

Your understanding is correct.

One additional factor that is important if you really want to go into FTSE trackers is dividends. Effectively all the growth in FTSE trackers in the past 10 years has come from re-investment of dividends. The actual index is about the same now as it was 10 years ago.

jimjames

GingerFurball wrote: »

Yeah, I get that, was just looking for an explanation in very basic terms how investors make money from funds.

Other question I have is about FTSE tracker funds - presumably the FTSE index correlates very roughly to the performances of shares within the FTSE 100 - so if the FTSE index is going up, then roughly speaking so are the values of the shares?

Roughly speaking but the important thing to remember is that not all shares are equal. Some shares have much higher weightings in the index than others so if they go up or down they can actually influence the direction of the index more than other shares. So in the FTSE100 not all 100 shares make much difference to the index. Without doing detailed maths I'm not sure of the exact numbers but potentially you could get one of the highest weighted shares like Vodafone collapsing in value which would outweigh rises in all the other 99 shares thus making the index fall.

GingerFurball_2

jimjames wrote: »

Roughly speaking but the important thing to remember is that not all shares are equal. Some shares have much higher weightings in the index than others so if they go up or down they can actually influence the direction of the index more than other shares. So in the FTSE100 not all 100 shares make much difference to the index. Without doing detailed maths I'm not sure of the exact numbers but potentially you could get one of the highest weighted shares like Vodafone collapsing in value which would outweigh rises in all the other 99 shares thus making the index fall.

So in this example the value of the tracker fund would depend on how much exposure to Vodafone the fund had?

mr_fishbulb

GingerFurball wrote: »

So in this example the value of the tracker fund would depend on how much exposure to Vodafone the fund had?

That would make up part of the value, but only proportionally to the value Vodafone makes up of the index the fund is tracking.

talexuser

GingerFurball wrote: »

So in this example the value of the tracker fund would depend on how much exposure to Vodafone the fund had?

yes, and that depends on the market value of the company compared to the benchmark total value, companies go in and out of the FTSE over time as they grow or shrink and then trackers have to reflect this.