Managed Fund help please

Professor_Lizard

Dear All,
Just looking for some help interpreting Investment Fund info as I look to go down this road for the first time.

A hypothetical fund I am interested in is available on my share platform. It is listed as a share with a buy/sell price (which I don't fully understand in itself - why isn't a cash investment just placed in the hands of the manager as a whole?)

My main question is this. Lets say said the fund share price is 300p (still don't understand why this is). Last years return was 20% based on the published performance data for the fund and we loosly expect it to perform to a similar standard next year. If I have £3K to invest, will I earn 20% on the value of the cash invested (based on "equity" gains with an increased value of the fund share price) or just 20% on the £1K value of the fund that I have brought (given that the price is 300p).

Apologies if this is not entirely coherent. Any help would be appreciated,

Many thanks,
D

pip895

Are you talking about an investment trust, an OEIC or something else?

bowlhead99

Imagine the fund has a total "net asset value" of £300million made up of some cash, some liabilities for costs, and a large portfolio of investments.

Then imagine it has 100 million shares or "units" issued to its investors. Therefore each share or unit is worth £3. If you want to buy some shares, you can buy 1000 of them for £3000. It issues you with some units and then it has 100,001,000 units in issue and total assets of £300,003,000 (i.e. its assets just went up by the £3000 cash you introduced, which it will spend on buying more investments in its portfolio). The asset value per unit is still £3.

Then after a year the fund value has doubled. Some more investors might buy in, or others might sell out along the way. But the purchases or sales are done at round about the fair net asset value per share at a point in time, so they don't change the overall performance (let's ignore that for now).

So after a year the whole pot of cash and other investment assets is worth £600,006,000 and there are still 100,001,000 shares in issue. Each share or unit is worth £6 each instead of £3. So if you like, you can sell your 1000 shares for £6 a share or £6000, which is a doubling of your initial investment of £3000, and stacks up with the claimed performance of a doubling in value on a chart or table. So you basically get the 100% or 20% or whatever they report, on all your cash invested.

EDIT:
Your other question is why is the buy and sell price not equal. This is a practical matter in that when you join or leave a fund there is a cost to the fund in terms of admin and other costs issuing or redeeming your shares and then going and spending your £3k on a little bit more of every asset in their portfolio.

If the "fair"value of an existing share was 100.0p, it wouldn't be fair to let you in for 100p as these costs would be eaten by all the other holders (including only a tiny 1000/100,000,000 share of the cost to yourself). So they might say buy price 100.25p, sell 99.75p. That type of pricing is common with Funds structured as "Unit Trusts" rather than Open Ended Investment Companies (OEIC) which do some sort of invisible adjustment in the background that you don't see so easily.

If the buy-sell spread is large, like 3-5%, it's likely your fund platform is showing you an "official" spread including a manager's "initial charge" but when you actually place your order, that element the spread will be discounted to zero because all major platforms rebate any initial manager fees that used to be charged as sales commission in the old days.

As a side note, as Pip says, if you are looking at an "investment trust" rather than a "Fund", this is a private investment company listed on a stock exchange, and such will have a fluctuating buy and sell price like everything listed a stock market and bought and sold by market makers and brokers every minute. In that case - unlike buying a Fund and having new shares created and issued to you by a manager - you are not giving the manager any money to invest at all, you are just buying existing shares off the old owners of the shares.

Hope that covers all the angles

Professor_Lizard

Specifically I am looking at small business focused investment funds on the HL platform.

Thanks,
D

pip895

I use the HL platform myself - However I find there data on investment trusts is relatively poor. www.trustnet.com is much better and includes historical information on discount levels and NAV.

Professor_Lizard

bowlhead,
many thanks, that is helpful. So the fund effectively behaves like a share in terms of equity gain? (i.e intrinsic value is gained based on the performance of the market).

At the moment I am looking at;

Cazenove UK smaller cos

and old mutual uk smaller cos

Any thoughts?

I accept this would be classified as high risk, but I feel smaller business funds will grow over the next 12-18 months as the Tories are likely to do everything they can to keep interest rates down until at least the next election...

jimjames

Professor_Lizard wrote: »

D
My main question is this. Lets say said the fund share price is 300p (still don't understand why this is). Last years return was 20% based on the published performance data for the fund and we loosly expect it to perform to a similar standard next year. If I have £3K to invest, will I earn 20% on the value of the cash invested (based on "equity" gains with an increased value of the fund share price) or just 20% on the £1K value of the fund that I have brought (given that the price is 300p).

If you need to ask such questions then you may want to do more research to fully understand the risks before you put your money in. 20% return this year does not imply any such returns for next year and the shares may already be fully valued.

Which fund/funds are you looking at exactly? And are they unit trusts or investment trusts?

What other investments do you own?

The initial question on values. Any return would be comprised of 2 parts, the increase in value of the fund from any increase in value of the shares it holds and any dividends paid by those companies. There is no guarantee on either of those parts but the dividend cannot be negative although the shares can decrease in value.

If you put in £1000 then any return is based on that. So 20% increase will be £1200 and a 30% decrease would mean you have £700. With a 50% increase in 2013 the fund could drop over 30% next year and still be back to where it started this year.

Are you prepared for that kind of drop in your money?

Edit - just seen reply. One of those funds is closing to new investment very soon which may or may not be a good thing for those putting money in now. A fund is just a collection of shares selected by the manager (for an actively managed fund) or based on an index (for a tracker fund)

bowlhead99

Professor_Lizard wrote: »

bowlhead,
many thanks, that is helpful. So the fund effectively behaves like a share in terms of equity gain? (i.e intrinsic value is gained based on the performance of the market).

Yes, the price you pay (or get paid when you exit) is linked to the underlying performance of the assets the Fund holds.

To confuse the issue, "Investment trusts" as mentioned by Pip are a slightly different beast because they are freely traded on a market and might sell for a discount or premium to the underlying assets on any given day, driven by demand for access to that particular manager's investment vehicle from minute minute. Whereas Funds (unit trust or Oeic) are priced one per day by their manager at or around the value of all their underlying assets.

At the moment I am looking at;

Cazenove UK smaller cos

and old mutual uk smaller cos

Any thoughts?

I accept this would be classified as high risk, but I feel smaller business funds will grow over the next 12-18 months as the Tories are likely to do everything they can to keep interest rates down until at least the next election...

I don't hold either at the moment but they have both done pretty well. It is a perennial decision whether to buy something that has just had, or is having, a "good run", given what goes up often comes down. Over a long long term one would expect smaller companies to grow if the economy does well. Tesco for example cannot quintuple its UK grocery market share, while a small high growth company might grow to 10 or 100 times its current size. Or collapse leaving owners with 100% loss.

That's why most people buy a bit of everything, rather than jump on the bandwagon of buying the highest percentage 6-24 month performer they can find out of 1000 options and trusting it to maintain top place.

If you don't mind a bit of risk, you'll find plenty of options out there but I couldn't tell you whether any will give you the results you hope for.

pip895

Those are OEIC's - sorry you had me confused a bit there. I have Cazenove UK SC and it has done pretty well for me - I am not currently adding more - particularly as they are soft closing. Have you had a look at Marlborough Multi Cap Income or if you really want SC how about Unicorn UK SC.

grizzly1911

pip895 wrote: »

Those are OEIC's - sorry you had me confused a bit there. I have Cazenove UK SC and it has done pretty well for me - I am not currently adding more - particularly as they are soft closing. Have you had a look at Marlborough Multi Cap Income or if you really want SC how about Unicorn UK SC.

What pip says.

I have Caz UK SC and Marlborough MC had both have done well recently.

In both cases there is no guarantee that they will continue to pertform at vthe same rate. They may flat line or even fall.

A basket of reasonably performing funds is more likely to show long term total gain of closer to 8/9%pa over a long period. That average will see some years with potential losses and others with an above average return. Depending on when you buy in could see you at the top or bottom of the slope. If you only want to hold fort a short period those rises or falls could be accentuated.

Once you have brought the fund it is no longer a cash investment. If you decide or need to sell at the wrong time then you may not get back what you initially invested.

Professor_Lizard

Thank you for the info and opinion all,
Pip and grizzly, thanks, I will look at Marlborough MC.
What are the implications of soft closing? There are no additional charges on HL that I can see, the 5% discount still stands.
Cheers,
D