Investment Funds and Collective Investment Schemes
This domain tests the structural differences between pooled vehicles - how they are priced, how they are charged, and why an investment trust behaves differently from a unit trust even when both hold the same shares.
Open-ended versus closed-ended
Unit trusts and OEICs (also called ICVCs) are open-ended: the fund creates and cancels units as investors buy and sell, and authorised funds are priced forward, at the next valuation point after the instruction is received. A unit trust has a manager and a trustee; an OEIC has an authorised corporate director and a depositary, and uses a single price. Investment trusts are closed-ended companies with a fixed number of shares; the price is set by supply and demand, so they can trade at a premium to or discount from net asset value, and they may borrow (gear).
Charges
The initial charge, annual management charge, and the OCI (ongoing charges figure) which includes the AMC plus other ongoing costs. Dilution levy or swing pricing protects existing investors from the dealing costs of heavy flows. Performance fees align the manager but can encourage risk-taking.
Regulation and structures
UCITS funds must diversify - no more than 10% in one issuer, and holdings above 5% cannot exceed 40% of the portfolio (the 5/10/40 rule). Non-UCITS retail schemes (NURS) and property authorised investment funds (PAIFs) cover other asset types. ETFs track an index and trade intraday like shares; synthetic ETFs use swaps, adding counterparty risk, and exchange-traded notes are debt, not funds.
Worked example
An investment trust has net assets of 480p per share but trades at 432p, a discount of (480 − 432) ÷ 480 = 10%. If the portfolio rises 10% to 528p and the discount narrows to 5%, the share price becomes 528 × 0.95 = 501.6p - a 16.1% gain for the shareholder from a 10% portfolio return, because of the discount narrowing. If the discount widened instead, the shareholder would underperform the portfolio.
Traps that cost marks
Assuming an investment trust's share price equals its NAV. Confusing open-ended forward pricing with intraday exchange pricing. Thinking UCITS is a tax wrapper. Ignoring that charges compound against the investor every year.