CISI - Financial Products, Markets & Services: Topic - Investment Funds Lesson: Introduction To Investment Funds

CISI – Financial Products, Markets & Services
Topic – Investment Funds

Lesson: Introduction to Investment Funds
cisi.org
What are investment funds?
Clients
Want to invest money to meet
particular objectives
Investment Also referred to as:

‘asset management’
Managers or ‘fund management’
Select the most appropriate investments

(mainly shares, bonds and money market
instruments) for their clients based on the
objective of an individual fund
Funds pool the money together of many
Funds investors
Are created by investment managers in which Also referred to as:

their clients can choose to invest. Each fund Collective investment funds or
includes a collection of investors Collective investment schemes or
Mutual funds cisi.org
Buy and Sell side – the importance of investment
management in financial services
Sell Side Buy Side

Investment Banks/Insurance
Exchanges
Private investors and individuals

Managers sales
Corporates (Equity/Debt)
Securities
Advisers
Houses Consultants
Investment
Pension Insurance funds
Banks
funds/Local
authorities/C
harities
The owners or managers of money that

Selling of investment ideas, are paying for the sell side services
strategies, advice and services to with fees or commission.
either those with money to invest, or
more likely those managing the Individuals investing their money,
investments on behalf of others however much of this investment is
done indirectly
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Benefits of Collective Investment
Larger orders attract:
Economies of  More competitive dealing fees and commissions
 More attention from brokers and investment bankers - investment
Scale information can be more timely and comprehensive
A diversified portfolio contains a substantial number of

investments and will be less risky than a portfolio with just one
Diversification or two investments in it.
“Don’t put all your eggs in one basket”!
Professional Give investors access to professional investment

management and geographical areas or asset classes
investment with which they may be unfamiliar
management
Regulatory Many funds are carefully vetted by financial

services regulators before they can be marketed
Oversight to potential investors.
Collective investment
schemes pool the Investing in funds can be tax efficient. Many funds do not
resources of a large Tax pay any tax on the income and gains they generate, and the
number of investors, with deferral investor only pays tax when she sells the investment.
the aim of pursuing a This is known as ‘tax deferral’
common investment
objective.
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Investment Styles
There are lots of different types of investment funds.
Objectives Styles
Each fund will have its own set of Each fund will be managed according to
objectives and it will be made clear the style adopted by the Fund Manager
the types of financial assets they to meet the objectives of the fund.
will invest in. ‘Style’ refers to the approach taken to
choosing the investments for the fund.
e.g. To invest in the shares of UK
companies with above-average Investment styles can be:
potential for capital growth.
 ‘Active’ or
 ‘Passive’
cisi.org
Active Management
Top-down approach
Manager focuses on economic and industry trends rather than the
prospects of particular companies e.g. Focus on growing economies
such as China
 Aims to out-perform a predetermined benchmark over a specific

time period e.g. Do better than the FTSE100
Active  Fund Manager uses fundamental (forecasting events and the likely
Management impact on a company) and technical analysis (Analysing share price
trends)
Bottom-up approach
Analysis of a company’s financial statements, strategy and
management as a priority.
e.g. Analysing a company’s net assets, future profitability and cash
flow
Momentum Investing
Growth Investing Value Investing Picking shares where the price
Contrarian Investing
Picking shares of Picking the shares of is rising on the assumption it Picking out of favour shares
companies most likely companies that are cheap will continue. that may have value the rest
to grow in medium and (under-valued) to their of the market may not have
spotted.
long term profits or cash-flow
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Passive Management
 Few active fund managers actually outperform their
benchmarks, with many doing worse.
 Lower dealing costs – ratio of staff to funds managed is

lower than actively managed portfolios as well as the
turnover of assets in the portfolio of investments being
lower
 Aim to perform in line with or ‘track’ the benchmark index.

Passive  Often described as Index-tracker funds or Indexation.
 It simply buys the index constituents which means that the
Management performance of the portfolio is designed to ‘track’ the up-and-down
movements of the index.
 Performance is impacted by the need to rebalance the

portfolio to replicate changes in the index constituent
weightings and to adjust for stocks being promoted into –
and being relegated from – the index.
 A passively managed Index-based portfolio will clearly

follow the index down in bear markets.
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Core-Satellite Management
Passive Active
Management Management
‘Core’
Core-satellite ‘Satellite’
is the name given to around management Is the name given to the
remainder of the portfolio
70-80% of the fund’s
portfolio which is invested which is invested in
in index tracking funds to specialist actively managed
minimise risk of funds or individual
underperformance securities
cisi.org
Range of Funds
There are almost 2,500 UK domiciled authorised investment funds available to investors
There needs to be a way to classify them so that investors can compare funds with similar
objectives.
Trade body, the Investment Association (IA) maintains a classification

system, as does the Association of Investment Companies (AIC).
The IA classifies investment funds between over 30 sectors. Within these,

funds are categorised as:
 Providing ‘Income’ or
 Providing ‘growth’ or
 ‘Specialised’ funds if they fall outside the previous two
Each of the sectors contains funds investing in similar asset categories in the
same stock market or same geographical area e.g. UK gilts or UK Corporate
Bonds
cisi.org
Range of Funds
A useful example of how the
IA sectors work can be seen
by looking at bond funds and
how the content of each
differs:
cisi.org
Authorised vs. Unauthorised Funds
The authorisation of an investment fund has nothing to do with it being illegal or illegal to buy into it or use
it but is related to who the fund can be marketed to. Authorisation is granted by the regulator – The FCA
Authorised Funds Unauthorised Funds
They are sufficiently diversified and invest in Perfectly legal

a permitted range of assets
They can only be marketed to certain types of
They can be freely marketed to the general investor e.g. investment professionals or
public in the UK sophisticated investors.
Unauthorised schemes are referred to as

unauthorised collective investment schemes
(UCIS). cisi.org

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CISI – Financial Products, Markets & Services

Topic – Investment Funds

Investment Also referred to as:

Select the most appropriate investments

Are created by investment managers in which Also referred to as:

Sell Side Buy Side

Private investors and individuals

The owners or managers of money that

A diversified portfolio contains a substantial number of

Professional Give investors access to professional investment

Regulatory Many funds are carefully vetted by financial

 Aims to out-perform a predetermined benchmark over a specific

 Lower dealing costs – ratio of staff to funds managed is

 Aim to perform in line with or ‘track’ the benchmark index.

 Performance is impacted by the need to rebalance the

 A passively managed Index-based portfolio will clearly

Trade body, the Investment Association (IA) maintains a classification

The IA classifies investment funds between over 30 sectors. Within these,

Authorised Funds Unauthorised Funds

They are sufficiently diversified and invest in Perfectly legal

Unauthorised schemes are referred to as

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