Investment Products, Funds and Collective Investments
Pooled vehicles
Collective investments pool client money to obtain diversification, professional management and scale. Open-ended vehicles (unit trusts, OEICs, SICAVs, most UCITS funds) expand and contract with demand and are priced at forward net asset value (NAV). Closed-ended vehicles (investment trusts) have a fixed share count and trade on-exchange, so their price can stand at a premium to or discount from NAV. ETFs trade intraday like shares; physically backed ETFs hold the underlying, synthetic ETFs use swaps and therefore carry counterparty risk. ETNs are debt obligations of the issuer, not funds.
Structured products combine a deposit or note with derivatives to deliver capital protection or enhanced participation; the investor takes the issuer's credit risk. Insurance bonds and pensions are tax wrappers rather than asset classes. Hedge funds typically charge '2 and 20', impose lock-ups and use leverage and shorting.
Charges and the active/passive decision
Costs include initial charge, annual management charge, ongoing charges figure/total expense ratio, performance fees, dilution levy and the bid-offer spread, plus platform and advisory fees. Costs compound and are one of the few certain determinants of relative outcomes.
Trap: an investment trust trading at a 10% discount has not 'lost' 10% - the discount can narrow or widen. A UCITS fund is not capital-protected.
Rule of thumb - the 5/10/40 rule: a UCITS fund may hold no more than 10% of NAV in a single issuer, and holdings above 5% may not in total exceed 40% of NAV.
Example: a fund with €100m NAV may hold up to €10m in one company, but its positions above 5% (i.e. above €5m) combined may not exceed €40m.