Business | Banking
Back to basics: Pooled investments
There was this doctor, lawyer, and a motivational speaker, (and by-the-way this isn't a joke), sitting at lunch one day and whilst the lawyer knew his fund and trust rules none of them could adequately explain the benefits of pooling their monies for investment purposes into the fund management universe.
- By Sean Kelleher, Special to Gulf News
- Published: 00:00 June 18, 2006
Dubai: There was this doctor, lawyer, and a motivational speaker, (and by-the-way this isn't a joke), sitting at lunch one day and whilst the lawyer knew his fund and trust rules none of them could adequately explain the benefits of pooling their monies for investment purposes into the fund management universe.
So perhaps it is a joke then, that structures that hold the vast majority of the world's wealth are so poorly understood?
So what is a fund and what benefits and risks do they possess? In a multi-national investment environment that is the UAE, the "what bit" is confused by the array of titles for more-or-less the same thing.
This is where the lawyer gets his own back. Speaking on behalf of the layman and, probably, the lion's share of the financial services industry, I am not sure I can explain the differences between: Unit Trusts, Mutual Funds, SICAVs, and a whole host of titles that add-up to the world of "Collective Investments".
What I can say is that they are more or less the same thing governed by different rules in different jurisdictions.
What the layman needs to know are the headline issues. They are all pooled investments in that your monies are added to a whole host of other people's monies to make a bigger sum.
The benefits? This where the motivational speaker gets his own back. He would say that we are all "motivated", ultimately, by either fear or greed. This is easily applied to Investment Strategy, not so easily applied to the motivation for using funds as an investment vehicle. Still, here goes.
Headlines on benefits? I've got three: diversification, economies of scale and professional management.
The value of diversification to the retail investor is huge in that it effectively reduces risk for smaller investors. The stockbrokers whom we regularly feature in this column are prone to call and ask whether I have friends looking to park money in a stock they feel will move (parking fees here usually in the $25,000 per share tranche).
You wonder who they think my friends are, because implicit in their "parking offer" is the fact that the really good stockbrokers get 40 per cent of selection wrong.
For the smaller investor diversification allows entry into big pools of money that spread an individual investor's money into a number of shares so that the risk of 40 per cent wrong is covered by 60 per cent that were right.
To improve the chances of this happening it is absolutely critical that the retail investor buys-in on a minimum three to five year basis. The fund scene then, is perhaps one of the vehicles that the regulators can encourage to take the retail investor (and his volatility) out of the domestic market?
The retail investor also benefits from the econ-omies of scale of pooled investments. The collection of dividends on shares, for example, is a hugely time consuming factor. The big funds will add this into normal operations at negligible cost.
The same applies to "professional management". I can tell you what the biggest companies in Japan are, but once you get to number eleven in the world's second biggest economy I might respond with a "you're talking Japanese".
Meaning, with the Japanese market moving well over the last couple of years, the average retail investor would have missed the boat if professional fund managers were not available to access the opportunity.
Recent trends have been improving the range of fund management benefits by way of the increasing numbers of portfolios being turned into funds. The significance here is that as a financial adviser I would have the option of offering one of two approaches to strategy. Either we recommend a series of funds that, when combined, form a portfolio strategy. Or, we offer a fund-of-fund approach that is in itself a strategy.
This latter approach, according to the Merrill Lynch-Cap Gemini World Wealth Report, is catching-on at High Net Worth level, yet is also easily available to the retail investor. It works well where, at the point-of-sale, the adviser has ascertained the investors' appetitite for risk and selected the portfolio/ fund accordingly.
The doctor is always holding an advantage when assessing risk. Too much of this and too little of that is always bad for you. You can't win with the doctor unless you know precisely what each part of your diet or behaviour does to you. Ditto on fund management.
The template for understanding what any particular fund is doing or could do to your wealth should include: understanding the benchmark, understanding the jurisdiction and your legal recourse, understanding the tax treatment, and understanding the management style and credibility of the fund manager and trustee/owners.
The writer is the Managing Director of Mondial (Dubai) LLC.
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