Sun | Nov 28, 2021
ADVISORY COLUMN: PERSONAL FINANCIAL ADVISER

Oran Hall | Pooled funds, a diverse range of investment possibilities

Published:Sunday | November 21, 2021 | 12:10 AM

Pooled investment funds include unit trusts, mutual funds, and funds used by securities dealers and insurance companies – as one of several options – to invest pension fund contributions. They combine the money of many to invest in a wide range of...

Pooled investment funds include unit trusts, mutual funds, and funds used by securities dealers and insurance companies – as one of several options – to invest pension fund contributions.

They combine the money of many to invest in a wide range of financial assets without giving any participant a claim to any specific asset.

The investment funds are really investment portfolios managed by professional fund managers to satisfy the various investment objectives of the investors. These funds are not customised to the needs of the individual investor but a single fund may come close to satisfy those objectives. In other cases, investments must be made in more than one fund to better match the objectives of the investor.

These funds are generally unitised. The value of the net assets of the fund is divided by the number of units to determine the unit value. This is a transparent way to determine value, and this price tells easily how well a fund is doing because it is possible to calculate the magnitude and direction of changes in the price.

Pooled pension funds are typically valued monthly and unit trusts and mutual funds weekly or daily, and using a single price to express value makes it easy to calculate returns.

One advantage of these funds is that they are managed by professionals who devote their time and skill to evaluate instruments and markets, to select investment instruments and to make the decisions best suited for the beneficiaries. That is not to say fund managers are infallible.

Having large pools of funds at their disposal allows the managers to employ a wide range of diversification strategies encompassing investment instruments and markets, for example, and thus reduce the potential for loss. In many cases, the managers create several investment portfolios, each having a different objective, capital growth and income, for example.

With respect to mutual funds and unit trusts, investors are better able to match the funds to their objectives as they are able to select the funds they prefer and determine what proportion to invest in each type.

Members of pension funds, though, do not make those decisions; it is the fund managers who generally have that responsibility.

Mutual funds and unit trusts in our market are open-end funds so investors can readily buy into them and sell when they wish, except in cases where there is a lock-in period. Contrast this with the difficulties investors sometimes have in buying or selling securities at all or in the required quantities due to market conditions.

Pension funds may have the same difficulties when they go to the market, but that does not hinder employers from remitting pension contributions to the pension fund managers to be invested ultimately. Of course, funds may be required when employees change employment or when they reach the age of retirement and are to be paid their pension benefits.

The level of liquidity required by individual investors is quite different from that required by pension funds, but the respective pooled funds operate in such a way to facilitate the need.

Because the management of the funds is separate from the ownership of the money invested, plus oversight from trustees, the risk of conflict of interest in managing the funds is significantly reduced.

Further, the invested funds are not commingled with those of the managers so this gives significant protection to the owners of the invested funds, and the way in which ownership is registered insulates the assets of the pooled funds from loss if the fund managers experience financial ruin.

Pension fund members and investors in other pooled investment funds, like unit trusts and mutual funds, trade in their own participation in the selection of investment instruments for the skill and savvy of professional investment managers.

The management fees the funds pay to the managers, which reduce the fund and unit values, is the price they pay for the above-average returns which they expect, but the value of their funds is not insulated from price fluctuations, especially in cases where the primary investment objective is capital growth.

Indeed, in such cases, it is conceivable that short-term negative returns may be derived from such funds.

Whether it is the monthly pension contributions of pension fund members or the systematic savings of small investors, pooled investment funds open the door to a structured investment programme to people who do not necessarily have significant sums to invest or the skill and time – or the authority – needed to do so.

Oran A. Hall, author of Understanding Investments and principal author of The Handbook of Personal Financial Planning, offers personal financial planning advice and counsel. finviser.jm@gmail.com