Mon | Apr 12, 2021

Oran Hall | Open and closed-end investment options for investors

Published:Sunday | March 14, 2021 | 12:18 AM

Open-end investment funds, which issue and redeem units in the case of unit trusts, and shares in the case of mutual funds, are becoming increasingly important in the Jamaican financial market.

They have been very beneficial to many investors, but not all investment funds are open-end. There are closed-end funds as well.

Closed-end funds make an initial issue to the public and rarely make additional issues and do not themselves redeem the investments the public makes in them. To recover their investments, investors must sell on a recognised stock exchange if the instrument is listed or on the over-the-counter market.

Like open-end funds, the net asset value, which is determined by subtracting the liabilities from the total asset value of the fund, then dividing by the number of shares or units, is important.

But the price may be above or below the net asset value, being largely determined by demand and supply, which are influenced heavily by expectations. Demand generally increases if investors expect the performance to improve, thus causing the price to increase and falls if the performance is expected to decline.

So closed-end funds trade like ordinary stocks do on the stock exchange, and sellers risk not being able to sell if there are no buyers, but in the case of open-end funds, there is always a buyer – the fund itself.

For open-end funds, the net asset value is the buying price and the selling price, with one exception: the case in which there is a load. This is the cost of selling or marketing the instrument. It is added to the net asset value, so the selling price is, therefore, higher than the net asset value. Investors wishing to encash their investment sell at the net asset value per unit or share.

Open-end unit trusts have been part of the Jamaican investment landscape since 1970 when the Jamaica Investment Fund came into being with an income fund and an accumulation fund. It was managed by the Jamaica Unit Trust Services Limited, which engaged Scotiabank Jamaica Trust and Merchant Bank Limited as trustee of the trust deed.

Capital and Credit Fund Managers Limited later became the manager, but JMMB Fund Managers Limited currently manages the funds, which have increased to eight. More recently, JN Fund Managers Limited set up its mutual fund – the first Jamaican-based – which now has six investment funds.

Today, nine companies manage 66 unit trust funds of different types. Although the primary assets in which they invest are equities, real estate, short-term and long-term debt securities, there are about 20 different types of funds due to how they are configured using both local and foreign instruments. Sagicor Global Funds, managed by Sagicor Investments Limited, has 18 funds.

This explosion of open-end funds has given a strong boost to the local investment market. Since they invest in the local stock market and buy debt instruments, they play a role in the growth of the stock market and the market for money market instruments as well as the bond market. And some also invest in real estate, thus boosting that market.

The wide variety of funds creates opportunities for investors to buy funds individually or in combination to best match their goals and capacity and willingness to take risk.

They have made it possible for even the unsophisticated to participate in the market as it is professional managers who take on the responsibility of making investment and other supporting decisions. Additionally, investors are able to invest even if they have little time to dedicate to such matters or have limited funds because of the low minimum sums required to invest.

The funds that invest in instruments denominated in foreign currencies give investors an opportunity to hold investment instruments that are issued in other markets, thus providing a greater level of protection against declines in the local economy and depreciation of the value of the local currency.

The liquidity of open-end funds cannot be ignored. It gives investors confidence to invest knowing that they will be able to convert to cash when necessary, the downside being that this could cause indiscipline if investors yield to the temptation to liquidate their investment on a whim.

One potentially big challenge open-end funds could face is the tendency some investors have to liquidate at least a portion of their investment when the markets – the stock market, for example – experience a downturn. Should investors opt to redeem their investments on a large scale, it could conceivably put pressure on their cash flow, likely making it necessary to liquidate some investment instruments.

Although a large-scale exit from open-end funds may cause serious erosion of their values, being able to increase their capital when new funds flow into them from investors puts them in a pivotal position to invest in new opportunities and to contribute to the expansion of the financial market and to economic growth.

- Oran A. Hall, author of ‘Understanding Investments’ and principal author of ‘The Handbook of Personal Financial Planning’, offers personal financial planning advice and