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 FT All Share Index and FT World ex UK, source Bloomberg.