Investment funds offer high-net-worth investors several advantages compared with bespoke portfolios of stocks or bonds. They provide access to expert money managers. They deliver diversification that may reduce risk. And they give easy access to types of specialist investments such as Asian stocks or alternative investments that might otherwise only be available to large institutional investors such as pension funds.
They have proliferated over the last 40 years and provide a wide range of investment opportunities, whether in the United Kingdom or other countries. The earliest investment funds were introduced at the beginning of the 20th century, but it was not until the 1980s that they multiplied in the United States, United Kingdom and then Europe. They did so as investors looked for ways to profit from the bull market in stocks and bonds that started in the 1980s, and as a wider variety of funds were introduced specialising in international markets and different sectors.
At Brown Shipley, we have expertise in selecting best-in-class funds to meet your investment objectives. We do not limit the universe that we choose from, believing that it’s important to be able to have access to the full range of asset classes and asset managers. This is called an ‘open architecture’ approach.
An investment fund invests in a range of stocks, bonds or even private markets holdings. Conceptually, it’s an investment product that brings you economies of scale. The fund’s size is generally sufficiently large to justify the costs of a professional, expert investment manager, as well as a portfolio that’s diversified across a large number of underlying securities – typically from as few as 40 to several hundred.
A fund pursues a specific investment aim that’s communicated by its name and explained in its marketing literature. For instance, a US technology fund would likely invest in high-profile technology companies like Nvidia and Microsoft, with its investment performance tied to their prospects at the forefront of generative AI’s explosive growth. High returns would come at the risk of high volatility. By contrast, a UK gilt fund would invest in government bonds, aiming for a low return but with little risk.
Investment funds may be either actively or passively managed. An active fund is managed by a portfolio manager who selects asset classes or individual securities aiming to outperform a stock or bond market index. By contrast, a passive (or index) fund only sets out to track the performance of an index and has the advantage of relatively low fees.
Among the most successful innovations in the investment fund world over the past 30 years are exchange-traded funds (ETFs), which are mainly passive funds. The first ETF was launched in the United States in 1993 and then in the United Kingdom in 2000. ETFs not only have low fees but also trade on stock exchanges. Being flexible, they’re used for both making long-term investments and for trading in and out of investment themes. More recently, some actively-managed ETFs have been launched.
Many funds consider companies’ environmental, social and governance practices when deciding which stocks or bonds to invest in—for instance having an explicit intention to deliver a positive impact alongside a financial return. We believe that doing so can lead to better investment decisions. When investing in third-party funds on your behalf, we take into consideration the EU Sustainable Finance Disclosure Regulation product disclosure categorisation, and our internal fund sustainability assessment.
In terms of important technicalities, there are different structures of fund that you’ll find can make a difference to investment performance. In the United Kingdom, open-ended funds are known either by the acronym of OEIC (open-ended investment company) or unit trust. They’re structured so that units are created or cancelled, respectively, as investors buy or sell. A closed-end fund is known as an investment trust and traded on a stock exchange. As it’s closed, the number of shares must stay the same and the stock price trades at a premium or discount to the underlying net asset value of the investments, depending on demand for the shares. The level of premium or discount affects the performance.
Everyone has different investment needs, risk tolerances and levels of investment expertise. For instance, if you’re a longer-term ‘growth’ investor with a 10-year time horizon, the short-term fluctuations of an investment fund may be less important than for an investor who needs to access their capital in the near-term.
Brown Shipley works closely with you to understand your risk profile. We regard this as the key assessment that we need to make. Whether you opt for our discretionary service, advisory service or execution-only service, the type of investment fund that’s right for you depends on your tolerance for risk.
There’s a range of different types of investment fund.
Cash, or money market, funds offer you a relatively low risk means of investing. They hold a range of cash and cash-like instruments, including bank deposits, short-term loans and high-quality bonds.
This type of fund invests in equities or stocks, offering you reasonably high levels of return on capital. Some funds mainly target capital growth, whereas others target a mixture of capital growth and income by investing in companies with high dividends. Funds can specialise in large companies or mid-to-small sized companies. Others differentiate themselves by geography, for instance investing in global equities, Europe or US equities.
Fixed income funds aim to be low risk, low return, often paying you an income. Government bond funds are generally the lowest risk, depending on the creditworthiness of governments. Corporate bond funds are somewhat higher risk and higher return, but many corporate bonds are judged by credit rating agencies to be investment grade.
The term ‘alternatives’ includes a wide range of investment types. They usually represent the highest risk/return profiles. However, where used appropriately within a portfolio they may increase your diversification, decrease risk and increase investment returns. They include structured products, absolute return funds, commodity funds, property funds, private equity funds, private debt funds and hedge funds.
At Brown Shipley, we invest our clients’ money using a quantitative and qualitative approach to carefully select investment funds from some of the world’s leading investment firms. To further enhance our investment capabilities, our parent firm, Quintet, has partnered with Blackrock, so our clients benefit from the resources of the world’s largest asset manager, while enjoying the personalised service of their local Brown Shipley team.
Secure your future. Invest in investment funds that may offer the perfect symphony. Talk to us about investing in investment funds.
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Important Information
Information correct as of 9 October 2024.
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