Some financial advisers have been ‘outsourcing’ investment management for years. Effectively, every time they recommended a special situations, strategic bond or equity income fund in the past, they were ‘outsourcing’ to an investment specialist.
The funds industry has certainly dominated the retail investment landscape in the UK over the past 30 years. So much so that the Investment Management Association recently reported that as of the end of February this year, its member groups have some £783bn under management.
The Wealth Management Association, on the other hand, which traditionally has provided clients with directly invested portfolios, reported assets under management for their members of around £629bn in the 4th quarter of 2013. Of this a significant amount is invested in private client portfolios.
There have been many reasons put forward over the years as to this difference. However, with the increasing popularity of mixed investment funds, discretionary managers are plying their trade more and more in the form of multi-asset fund provision.
The lines between fund group and discretionary manager have certainly blurred, as fund based solutions maintain their popularity.
With a vast number of investment strategies being marketed by different types of firms, the need for a professionally created portfolio of investment assets,which is then maintained by the watchful eye of an investment professional, remains a strong one for many. With that comes the need to understand how to match correctly which solutions are suitable to which client segments.
It’s about which fund type to choose
Pooled investments continue to see good net inflows, the industry has reported. But are all funds the same? Specifically, are all fund structures the same: do you need to worry about which ones to use, and how would you then go about deciding which one to use?
To answer these questions, first, we need to go back to basics.
A fund is an inherently simple structure. Investors’ contributions are pooled together and the money is used to buy a portfolio of assets and that portfolio is then maintained by an investment professional.
Funds give investors an opportunity to invest in a range of securities, sometimes other assets as well, and diversify risk even with smaller investment amounts. Certain funds also come with certain tax benefits.
Apart from the investor, there are two other main parties involved in the fund management process:
• the fund manager who makes investment decisions but, importantly, does not own the assets; and
• the depositary (or trustee) who safeguards the assets and oversees the manager, ultimately in the interests of the investors.
Beyond all this, it gets far more complex. There are multiple regimes and rules that govern the fund investment process, especially when overseas assets are involved. Fund structures vary - with beguiling acronyms currently abounding including Ucits, Nurs, QIS, AIFMs, Paifs and Ucis - and advisers should analyse the differences to be able to offer the most suitable solution.
