How to choose a fund, part 2


Most of this article will relate to Unit Trusts. However, to that people can see the difference:

– Exchange Traded Funds are listed on a stock exchange and investors buy or sell them in the same way as they would shares. They are very good for people who like liquidity.

– An Investment Trust is a closed end fund and there is no fluctuation in the amount of shares as they are fixed at the time of launch. When you buy into the fund you just buy shares directly and the value goes up or down like any other stock. These shares can trade at a premium or a discount when compared to the value of the assets of the fund.

– Structured Products (evil things that they are!) are created out of theory. Over the years there have been many schemes which offer investors a steady rate of return irrespective of whether actual profits or losses are being made. These are collectively called Mark-to-Model (M2M) schemes, as they base their performance on a model, not a market. Why don’t people who create such schemes use market prices? Well, because such prices don’t exist! Common M2M funds are based around student accommodation, litigation, life settlement, trade endowments, etc. However, not all of them are evil but we will discuss these later in the year.

Many people who have not invested before wonder why they should bother with funds and fund managers. They believe they will only be investing in the stocks and shares they would have invested in themselves so why give someone else the money when you could do it yourself? As stated above, in a Utopian portfolio, you will have investments into both stock markets directly and funds as well.

However, for the new investor who has no experience, investing for the first time may seem daunting if you want to do it by yourself. An alternative may be to use a fund manager even if it is only to follow what he or she does so you can see how things happen. Yes, you will lose out on having overall control of your money but this may be no bad thing at the beginning. There is also the chance of losing out on potential shares that do well. For example, let’s say you wanted to invest in company X and you know the shares have gone up by 20% in the last six months but you seen that your fund has only 3% invested in this company and that these profits have also been diluted by losses in other companies then you are not going to be very happy. Conversely though, if company Y has lost 20% and you only have 3% in it then you will have been protected by the diversification employed by the fund manager.

Once you get an idea of how to manage your own money, you may want to take on more responsibility. To dip your foot in the water, you might want to put 40% of your investment into US utilities, 30% into UK equities, 20% into Asian emerging markets and 10% into commodities, i.e., you have chosen the sectors but the fund manager you use will pick the actual companies to invest in. There are tens of thousands of funds you can choose from to you should be able to find one that meets with your criteria.

This will allow you to control things more than just giving everything to one manager. However, whilst this gives you what you want it also gives you more problems as you have to manage it all. This is where a Life Company can help. These usually operate out of a tax free haven and they will supply a Personal Portfolio Bond (PPB) which allows you to manage as many funds and shares as you like via one central source. Some PPB providers will even offer up to 90% protection on your investments.

Even for investors who have many years of experience, it is always an idea to hold some funds in a portfolio. No-one has a monopoly on good ideas and whilst you may have built up a good knowledge on say, German automobile manufacturers, you may not be too good on US pharmaceuticals. By using a fund manager to invest for you in the latter then you reduce the risk of making a poor investment choice.

The above data and research was compiled from sources believed to be reliable. However, neither MBMG International Ltd nor its officers can accept any liability for any errors or omissions in the above article nor bear any responsibility for any losses achieved as a result of any actions taken or not taken as a consequence of reading the above article. For more information please contact Graham Macdonald on [email protected]