By pooling money with other savers, a much larger universe of firms and other assets can be shared than anyone could achieve on their own.
Open-ended collectives are the most popular with the likes of a unit trust. When you save or withdraw money through an open-ended fund, new units are either created or cancelled.
This usually takes place on a daily basis and normally the investor buys or sells at the next valuation point. By comparison, closed-ended such as investment trusts have a fixed number of shares and are quoted on the stock exchange.
On the downside, the saver does not know in advance of making the decision the exact price that will be paid. This is because the number of units is not fixed and the price reflects the value of the underlying investments rather than demand for the fund itself.
So there are none of the premiums or discounts offered to investment trust clients. There is also no ‘gearing’ or borrowing allowed.
After the 1929 Wall Street Crash, mutual funds were established in the US to counter the risks of investing in single companies. In the UK, the first unit trust was created in 1931 when Ramsay MacDonald was prime minister and Jacob Schick invented the electric razor.
M&G formed the First British Fixed Trust, an umbrella for holding 24 companies which stayed the same composition for two decades.
Open-ended funds are the mainstay of most people’s stock market ISAs and there is an enormous range to choose from so that it can be quite daunting. If you lack the knowledge or confidence to make selections that reflect your aspirations and risk tolerance, consult a wealth manager or experienced independent financial adviser.
The benefits of open-ended “cannot be overstated”, declares broker Redmayne Bentley which was founded by a Yorkshire bank clerk in 1875. It says that in areas that typically produce higher volatility, such as emerging markets, open-ended often helps lower turbulence.
The firm highlights BNY Mellon’s Global Emerging Markets fund as benefitting by an open-ended structure, providing investors with “strong, consistent performance over the long term”. Its experienced management team provides exposure to such countries as India, China and South Africa which are still underrepresented in most portfolios.
Accessing a professional manager for a relatively small fee is a good reason for taking the collective route. They assess the relative risks before buying and consider how assets will work together. Backed up by a research team, they can also obtain more detailed company information including visits than an individual saver can achieve.
The cost of purchase can be as little as £25. “To buy such a diversified portfolio of shares you would need £20,000 and probably more to ensure costs are kept in check,” says Adrian Lowcock, head of personal investing at adviser, Willis Owen.
He adds that the difficulty and expense in buying on certain overseas stock markets is another reason for taking the fund approach. All day to day administration including dividend receipts and taxation is handled by the fund.
However, Jason Hollands of Tilney Investment Management warns: “If open-ended funds become too popular, they may balloon in size, making it harder for the manager to make changes quickly.
“Because most open-ended are set up to deal on a daily basis, big inflows or outflows can potentially be quite disruptive, requiring the manager to ditch holdings to generate cash to pay out investors making withdrawals.”
Open-ended property funds have recently been at the mercy of the markets. Bricks and mortar cannot be sold speedily and efficiently, forcing funds like Kames Property Income and M&G UK Property to be suspended, thereby excluding new savers and trapping existing ones for long periods of time.
Darius McDermott, of Chelsea Financial Services, says to look for long-term managers who have created good returns, notably:
Matthew Dobbs at Schroder Asian Alpha Plus: first out of 52 sector funds since 2007 (264.5 per cent v 127.7 per cent average)
James Barker at MI Chelverton UK Equity Growth: first out of 219 funds since 2014 (155.4 per cent v 28.8 per cent average)
Martin Lau at First State Greater China Growth: first out of eight since 2003 (1,093.9 per cent v 543.9 per cent average)
Two funds tipped by Hollands are Liontrust Special Situations, which invests in the UK, and TB Evenlode Global Income with an international remit.
Artemis Global Select is Lowcock’s choice whose manager, Simon Edelsten, focuses on businesses with high barriers to entry, sustainable cash flows and strong management.
He also recommends Threadneedle UK Equity Income which invests in both growth and value companies with strong cashflow including ones that may be out of favour.
For the US, Martin Payne at Brewin Dolphin in Leeds selects Baillie Gifford’s American Fund which seeks innovative companies and aims to outperform the S&P 500 index by at least an annual 1.5 per cent over rolling five-year periods, achieving 766.1 per cent growth in a decade.
Technology forms over a quarter of another Payne tip, Invesco Asian. The fund excludes Japan and aims to achieve capital growth and is up 145.6 per cent in 10 years.
The term ‘open-ended’ covers several forms. A unit trust is a business where the legal owner is the trustee and the investor is a beneficiary.
Units are separately priced for buying and selling, termed ‘bid’ and ‘offer’.
An open-ended investment company (OEIC) is a firm, not requiring a trust, and a single price applies like a US mutual fund or the European equivalent, the SICAV.
A good OEIC example identified by Redmayne Bentley is the Fundsmith Equity Fund, run by established stock picker Terry Smith.
It has achieved market-beating growth since inception with 155 per cent return over five years, largely by recognising totemic companies like Microsoft and PayPal.
With some foreign registered funds, take care if denominated in a non-sterling currency as this adds a risk factor.
Do not assume that big names will automatically be the best performers. According to Bestinvest’s informative Spot the Dog review, Fidelity’s American Special Situations actually lost money over three years, returning £99.86 for £100 invested by comparison with £120.40 from Loomis Sayles US Equity Leaders.
Watch for the most competitive share class. If the investment was made some years ago, it may still incur a higher ongoing fee to rebate commission to an intermediary. In that situation, transfer within the fund to a lower cost unit.
Where an open-ended and closed-ended share the same manager and have virtually the same holdings, investment trusts outperform on average by 55 per cent over five years and by 91 per cent over a decade, according to AIC/Morningstar research for The Yorkshire Post.
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