Collectives

Collectives (or funds) provide diversification by offering exposure to a range of markets at a relatively low administration cost. An open-ended fund creates and redeems units at a price based on the value of the underlying assets as money flows in or out. An investment trust is a closed-ended fund in which shares trade on an exchange at a market price, which may be at a premium or discount to the underlying asset value. Investment trusts can use leverage and tend to have lower management fees than open-ended funds. Investment trusts tend to trade at a discount to their underlying value – and therefore offer better value – in periods when a market is out of favour. An exchange traded fund (ETF) has the advantage of being both open-ended and closed-ended and always trades near to parity with the underlying assets. Most ETFs are passive funds and track a particular market index, which reduces the risk of underperformance by the manager – although, conversely, the manager does not have the opportunity to significantly outperform.

Click to enlarge

Five year percentage change in All UK Equities (black line) and World ex UK Equities (orange line), source Bloomberg.